Jefferies remain positive on Financials and believe ICICI Bank (credit quality holding up & valuations reasonable), HDFC Ltd (best play on housing demand surge) and IndusInd Bank (business normalising after 2 years) offer the best risk-reward. Growth will likely be concentrated among stronger banks/NBFCs. Asset quality will be scrutinised vs guidance. Private bank profit may rise by 38% in FY22, from a low base. An uptick in fees and a rise in NII should drive operating profits in FY22. Coupled with a normalisation of credit costs, we expect a 38% YoY rise in FY22 for private banks' profit, albeit from a low base.

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Economic activity has rebounded to near pre-Covid levels but is uneven. Jefferies thus expect govt and RBI support to continue: easy liquidity, low rates, and guaranteed loans. Higher commodity prices and a retail uptick should boost credit growth to 7.5-8%, with larger lenders benefiting more.

Real rates have turned negative for the first time in seven years. Coupled with improved mortgage affordability, this is driving housing demand growth in India and globally. Low rates will also drag deposit growth and narrow the wedge between credit-deposit growth. RBI & Govt have helped to avert crisis among NBFCs. Still, growth will be polarised towards NBFCs/HFCs that are better rated and have been engaged with better borrower-categories and segments.

RBI has been open to giving new bank licenses. There have been suggestions for licenses to be granted even to corporations & that encouraging NBFCs to be banks will improve credit to SME, raise competition for deposits & privatize credit.

Asset quality will be compared with guidance and buffer-provisioning levels. Jefferies built a surge in downgrades in the second half of FY21 and FY22, but with buffer provisions, built-in credit costs should normalise soon. Indian financials outperformed EM & Global markets in 2020. Correlation in price action was at 80-90% vs 20-40% in 2019. Beta is expected to outperform, led by financials; lower rates/cost of equity support rerating.

The key risk will be from the second wave of Covid cases and resultant lockdowns that could negatively affect cash flows for customers and will push slippages and credit costs higher than our forecasts. If credit cost for FY20 is higher by 10% than the base case, it could affect earnings by 2-14%, with the highest impact on PSU banks, followed by private-corporate banks and lower for retail lenders. This could also have a negative impact on confidence on lending if banks/NBFCs turn cautious.