New Delhi, April 4 : With outperformance by other private and mid-tier PSU banks, the valuation gap between mid-tier and frontline banks has narrowed, Elara Securities said.

Frontline banks ' HDFC, ICICI and Kotak Mahindra among private banks ' and State Bank of India among PSU banks underperformed.

Lack of significant asset quality challenges and better growth may ensure sustained rerating for PSU banks based on earnings stability, Elara Securities said.

In the past month, the Bank Nifty has slightly outperformed but underperformed over the past 12 months. Among banks, private bank leaders have underperformed while PSU banks and insurance companies have outperformed.

The gap between credit and deposit growth has remained wide, with the former at more than 16 per cent YoY and the latter at 13 per cent YoY. Liquidity remains tight, which may strain the deposit rates, the brokerage said.

Calibrated growth expansion and granularity of funding backed by diversified liability franchise will form the bedrock of business strategy for NBFCs as they tackle the regulatory forbearance tight funding milieu and capital constraints, the brokerage said.

Cyclical tailwinds, improving operation efficiencies and a continued benign credit quality environment will support earnings. Credit cost may rise in Q4, in line with regulatory restraints, but we expect no meaningful negatives. Diversified and gold finance plays are to remain in the limelight.

/IANS