Large Private Banks Set For Next Leg Of Rerating, Says Morgan Stanley

Morgan Stanley raised price targets for India’s top private banks, citing “strongest ever balance sheets” and accelerating growth and market share.

“We remain positive as the growth momentum is strong, and believe that the next leg of returns will be driven by valuation rerating to much above-average valuations,” a team of Morgan Stanley analysts led by Sumeet Kariwala said in a note.

The research firm listed ICICI Bank Ltd., HDFC Bank Ltd. and Axis Bank Ltd. as its top picks among private banks. “A combination of valuation rerating and strong earnings compounding drives 30-40% upside for the group.” It also expects lenders like IndusInd Bank Ltd. to benefit from the cyclical tailwinds.

Large private banks have seen strong improvement in profitability in recent years, helped by higher loan spreads, low cost-income ratios and lower tax rates. “This will drive RoAs (return on assets) to near or above peak levels. Leverage is still much lower versus history and that implies continued improvement in RoE (return on equity), as loan growth continues,” Morgan Stanley said.

Also, asset quality trends have been much better than expected at large private banks, it said. Impaired loan formation was expected to pick up as the moratorium ended in August 20, and restructuring window for corporate and retail loans ended in December 20. But the trends, it said, surprised positively. “Large private banks have seen retail collection efficiency normalise to around pre-Covid levels, and hence, we expect slippages to moderate sharply in FY22.”

Morgan Stanley also expects high non-specific and excess specific provisions to cushion any unexpected stress, unlike the previous cycles. “Large private banks have a strong rating profile and / or have not lent to lower-rated segments, and we expect any potential negative surprise to be manageable.”

Here’s what Morgan Stanley has to say about its top private bank picks...

HDFC Bank

• Maintains ‘overweight’ rating; raises price target to Rs 2,000 apiece from Rs 1,775.
• Higher sustainable return on equity assumptions for the banking business.
• Solid long-term play with strong funding franchise and continued market share gains in low-cost deposits.
• Loan growth has continued to outperform despite slowdown related to Covid-19.
• Asset quality is robust given strong underwriting capabilities and lending to prime borrowers across segments.
• Current valuations appear attractive in the context of strong EPS growth.

ICICI Bank

• Maintains ‘overweight’ rating; hikes price target to Rs 850 apiece from Rs 750.
• Management has built provisions aggressively and accelerated deposit market share.
• Retail asset quality has held up well, underscoring improved underwriting practices.
• Balance sheet is strong; sees the bank as well positioned for the upcoming cycle.
• Cyclical headwinds are subsiding; sees earnings upgrade cycle ahead
• Credit costs should normalise and pre-provisioning operating profit margin can improve to all-time highs.

Axis Bank

• Maintains ‘overweight’ rating; increases price target to Rs 1,000 apiece from Rs 775.
• Expects further improvement in loan growth, led by secured assets.
• Asset quality is improving.
• Bank is well placed for credit cost normalisation in FY22.
• Aggressive in improving its coverage on stressed loans and has potential to drive strong revenue growth.
• Current valuations are attractive.