Indian banks which were pummeled in the recent sell off are likely to see return of global investor allocation in the new year as credit growth is set to accelerate and costs of providing for defaults may reduce, said Jefferies. More than $2 billion worth banking stocks were sold by FPIs.

As per Jefferies, due to the recent sell-off most marquee financial stocks are trading at attractive valuations.

is trading 2.2 times price to book (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 favourable risk-reward for banks with ICICI Bank as as top pick and HDFC Bank given growth rebound & fair valuation,” Jefferies said in a note.

Also with bank credit growth improving steadily to 7% vs 5-6% earlier this year, the uptick is reflecting a rise in retail demand, better economic activity and inflationary push for working capital demand. According to the brokerage house, with corporate balance sheets mended, corporates in sectors like steel, roads, PLI-schemes are lining-up investments; appetite for SME lending can improve.

“These can lift growth in bank credit to plus 10% over the next 12 months,” the note by Jefferies stated. “Over FY21-24, we see this driving a 17% Cagr in core operating profits for private banks and 8% for PSUs.”

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

“With low restructuring and quality of ECLGS-loans holding-up, we see credit costs to drop from 2.2% of average loans in FY21 to 1.5% in FY23-FY24,” as per the note. “This will support near doubling of earnings for the sector over FY21-24 with upside if banks dig-into their buffer provisions.”

Meanwhile, while there are some concerns on impact of fintech on banks’ fee pools, Jefferies perceives limited impact given diversified feel pools, scope to grow fees from SME, and retail credit segments.