Morgan Stanley Cuts India’s Weight In Its Asia Banks Portfolio

Morgan Stanley has cut India’s weight in its Asia banks portfolio by about 8 percentage points as the nation’s economic indicators turned bleaker.

India’s weight in Morgan Stanley’s Asia banks portfolio stands at 17.5 percent as against 25 percent earlier, the global research firm said in a report.

Morgan Stanley had HDFC Bank Ltd., IndusInd Bank Ltd. and ICICI Bank Ltd. from India in its Asia banks portfolio. While it has removed IndusInd Bank during the latest revision, it cut ICICI Bank’s weight to 10 percent from 12.5 percent. HDFC Bank’s weight remained unchanged at 7.5 percent.

The stocks of most lenders featuring in Morgan Stanley's Asia banks portfolio have declined so far this year amid macro concerns. They have also underperformed the benchmark indices of their respective countries, the report said. Hong Kong, Thailand, Korea and India were the worst performers. In India, banks engaged in wholesale funding saw the steepest correction in stock prices, the research firm said without naming the entities. Still, estimates of their earnings per share are little changed as credit costs remain benign, it said.

While EPS estimates for most banks in the Asia portfolio were downgraded in the range of 1-3 percent, midcap Chinese and a few Korean lenders saw an earnings upgrade. But if economies remain weak, credit costs will start rising and earnings estimates will be lowered. Most immediately at risk are Hong Kong and India, Morgan Stanley said. While credit loss is expected to rise in Hong Kong, liquidity crunch in corporate and MSME sectors may intensify in India, it said.

Morgan Stanley wants to own stocks with large pre-provisioning operating profit margin so that a rise in credit costs won’t affect returns. Historically, the research firm has had growth stocks in its portfolio, but now it is adding banks that are cheap on multiples and have more ability to factor in higher credit cost assumptions.