Valuation Gap Narrows Between Mid-Tier and Frontline Banks, Says Elara Securities

Elara Securities has highlighted the narrowing valuation gap between mid-tier and frontline banks, with certain private and mid-tier PSU (Public Sector Undertaking) banks outperforming in recent assessments.

The analysis pointed out underperformance by frontline banks such as HDFC, ICICI, Kotak Mahindra among private banks, and State Bank of India among PSU banks. This trend was contrasted by the success of other private and mid-tier PSU banks.

Elara Securities attributed this phenomenon to the absence of significant asset quality challenges and promising growth prospects, which could lead to sustained rerating of PSU banks due to earnings stability.

Over the last month, the Bank Nifty slightly outpaced previous performance but exhibited underperformance over the past year. Notably, private bank leaders fell short while PSU banks and insurance companies exceeded expectations.

The gap between credit and deposit growth remained notable, with credit growth exceeding 16 percent YoY (Year over Year) compared to deposit growth at 13 percent YoY. Elara Securities suggested that tight liquidity might strain deposit rates in response.

Elara Securities also discussed strategies for Non-Banking Financial Companies (NBFCs), emphasizing growth expansion and diversified funding sources in response to regulatory constraints and capital limitations.

Looking ahead, Elara Securities predicted favorable cyclical trends, operational efficiencies, and a sustained benign credit environment supporting earnings. They anticipated a rise in credit costs in Q4 due to regulatory measures but anticipated minimal adverse impacts. Diversified and gold finance segments are expected to attract attention in the coming period.