In recent times, the valuation gap between mid-tier and frontline banks has narrowed due to the outperformance of certain private and mid-tier PSU banks, as pointed out by Elara Securities. Frontline banks like HDFC, ICICI, Kotak Mahindra, and State Bank of India have shown underperformance compared to others in the sector.
Elara Securities noted that the lack of significant asset quality challenges and better growth prospects may lead to sustained rerating for PSU banks, based on earnings stability. While the Bank Nifty has slightly outperformed in the past month, private bank leaders have underperformed while PSU banks and insurance companies have shown better results over the past 12 months.
The gap between credit and deposit growth remains wide, with credit growing at over 16% YoY and deposits at 13% YoY. Liquidity constraints may lead to increased pressure on deposit rates, according to the brokerage. To address these challenges, NBFCs are focusing on calibrated growth expansion and a diversified liability franchise to navigate regulatory constraints and capital limitations.
Despite potential challenges in Q4, such as a rise in credit costs due to regulatory restraints, Elara Securities expects overall positive outcomes for the sector. Cyclical tailwinds, operational efficiencies, and a stable credit quality environment are expected to support earnings. Diversified and gold finance offerings are likely to be in the spotlight in the near future.
