Morgan Stanley Sees Large Private Banks Entering A ‘Golden Age’
A motorcyclist and passenger travel past branches of ICICI Bank Ltd., HDFC Bank Ltd. and Punjab National Bank on a near-empty street in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Morgan Stanley Sees Large Private Banks Entering A ‘Golden Age’

Morgan Stanley raised its outlook and price targets for banks as it expects a sustained recovery for the sector, particularly large private lenders, in 2021 on the back of higher revenues and lower credit costs.

Large private banks have emerged stronger out of the Covid-19 crisis as they strengthened their capital, built excess provisions and strengthened their liquidity positions, Morgan Stanley said in its 2021 outlook note titled 'Large Private Banks–Entering A Golden Age'. "A combination of these factors will help them gain rapid market share and materially lower cost-to-income ratios over the next few years."

Most estimates anticipated banking sector's asset quality to come under pressure again after the six-month moratorium on loans in August. The sector, especially private lenders, has not seen bad loans rise as much as feared. Moreover, these lender raised funds to boost capital buffers.

Morgan Stanley expects a potential upside of 25-40% for large private banks from current levels, with ICICI Bank Ltd. and HDFC Bank Ltd. being its top picks.

The brokerage, however, downgraded Kotak Mahindra Bank Ltd. to 'equalweight' from 'overweight' despite similar tailwinds and an estimate of 22% earnings CAGR over FY21-23. "At 26x FY23E earnings, this is largely priced in," the note said, adding that it awaits a better entry point for the lender.

Morgan Stanley is also expects further earnings upside for banks. A caveat here is that macro recovery needs to sustain as reflected in the high-frequency indicators and rates should remain benign.

For mid-sized banks, Morgan Stanley expects a cyclical uplift in earnings ahead. Mid-sized banks had an additional challenge following Yes Bank Ltd.'s rescue and a decline in deposits in Q4FY20. However, according to the note, there has been a strong improvement in growth over the last two quarters.

"The extension of government credit guarantee scheme will further help reduce asset quality stress," it wrote in the note. Morgan Stanley anticipates credit costs at such banks to normalise in H2FY22-FY23. "We expect these banks to further reduce the gap to large private banks over the next year."

Key Risks Highlighted By Morgan Stanley

  • Higher-than-expected non-performing loans for SME/BBB and below-rated segments.
  • Slower-than-expected growth pickup.
  • Sharp resurgence in Covid-19 cases.
  • Higher-than-expected competitive intensity, impacting margins.

Stock Recommendations

  • Morgan Stanley has raised price targets on all banks under its coverage.
  • Upgraded IndusInd Bank to 'overweight' from 'equalweight'; price target raised to Rs 1,075 apiece from Rs 710 apiece.
  • Downgraded Kotak Mahindra Bank to 'equalweight' from 'overweight'; price target raised to Rs 1,975 apiece from Rs 1,650 apiece.
  • Upgraded Federal Bank to 'equalweight' from 'underweight'; price target raised to Rs 75 apiece from Rs 50 apiece.
  • Remains 'underweight' on non-SBI PSU lenders like Bank of Baroda, Canara Bank, Bank of India and Punjab National Bank.
  • Biggest upside potential for ICICI Bank at 40%
  • Biggest downside potential for IDFC First Bank at -47%.
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