State-run lenders Bank of Baroda, Indian Bank and Vijaya Bank on Monday posted higher

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quarterly profit, beating street estimates, mostly aided by higher interest earned and somewhat easing asset-quality concerns for Indian banks.

The battered down BSE Banking Index rose 1 percent, outperforming the broader market which fell 0.22 percent.

"PSU (public sector utility) mid-cap banking has been battered badly in the past 1-2 years, thanks to the fears of NPAs, fear of slowdown etc," said Jagannadham Thunuguntla, head of research at SMC Global Securities.

"But today what has happened is the quarterly results that are coming out are not as bad as originally feared. NPA ratios have gone up, but not as much as feared," he said.

However, Canara Bank disappointed with a 15.5 percent fall in profit for the quarter, as the bank had to pay out more in interests.

As many as 14 Indian banks, including top private lender ICICI Bank and Oriental Bank of Commerce are reporting financial results for July-September on Monday, which is expected to shed light on the outlook for the sector.

Bank of Baroda posted a 14 percent jump in net profit to 11.66 billion rupees, while profit at small rival Indian Bank also rose 17 percent to 4.9 billion rupees.

During the weekend, Indian Overseas Bank also posted a marginal jump in net profit to 2.07 billion rupees.

India's central bank last Tuesday deregulated savings deposit rates, its last administered bank rate, in a move that will expose such accounts to policy rates changes and push up the cost of funds for banks, sending shares in the industry lower.

"I think it will take one or two quarters at least for people to really digest savings bank deregulation, overall impact, GDP slowdown impact etc," Thunuguntla said.

"But whatever said and done, in the short term, banks are giving you a relief rally," he added.

Indian banks are struggling with lower margins, as the Reserve Bank of India has raised policy rates as many as 13 times in 18 months to combat stubborn inflation, worsening demand for loans.

Union Bank of India posted weak results last week and dragged down the market down with it as analysts were concerned about non-performing assets at state-run lenders.

At 12.40 PM, Vijaya Bank shares were up more than 8 percent, while those of Indian Bank rose 4 percent. Bank of Baroda shares also rose over 5 percent.