Bank credit could grow more than 10% over the next year: Jefferies

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Indian banks that were beaten in the recent sell-off should see the return of global investor allocation in the new year as credit growth is expected to pick up and default provisioning costs may decline, Jefferies said. More than $2 billion worth of bank stocks have been sold by REITs.

According to Jefferies, due to the recent sell-off, most high-profile financial stocks are trading at attractive valuations.

trades at 2.2 times the book price (PB) while HDFC Bank is at 3 times. Axis Bank PB is at 1.6x, at 1.3x and State at 1.2x.

“We see favorable risk-reward for banks with ICICI Bank as the top pick and HDFC Bank given the rebound in growth and fair valuation,” Jefferies said in a note.

Additionally, with bank credit growth steadily improving to 7% from 5-6% earlier this year, the rise reflects increased retail demand, better economic activity and an inflationary surge in demand for funds. rolling. According to the brokerage, with corporate balance sheets corrected, companies in sectors like steel, roads, PLI schemes are aligning investments; the appetite for SME lending may improve.

“These can lift bank credit growth to more than 10% over the next 12 months,” Jefferies’ note said. “In FY21-24, we see this driving a Cagr of 17% in core operating profit for private banks and 8% for PSUs.”

Banks managed asset quality well with slippages and restructuring under control. Most analysts who follow banks say that going forward, the NPA ratio will moderate due to lower slippages, higher collection, loan write-offs and comfortable provision coverage.

“With weak restructuring and ECLGS loan quality, we see credit costs fall from 2.2% of average loans in FY21 to 1.5% in FY23-24,” according to the note. “This will support a near doubling of sector profits in FY21-24 with an upside if banks dig into their buffers.”

Meanwhile, while there are concerns about the impact of fintech on banks’ fee pools, Jefferies sees limited impact given the diverse sensation pools, the possibility of higher fees for SME and retail credit segments.

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