Morgan Stanley believes large Indian private banks entering ‘golden age’, revises target prices

The performance charted by large private sector lender in India has turned global brokerage firm Morgan Stanley bullish on domestic banks.
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The story for India’s banking sector has made a turn-around in less than a year. From fears of a huge spike in non-performing assets last summer to now seeing lenders emerge with strong balance sheets, the tables have turned. The performance charted by large private sector lender in India has turned global brokerage firm Morgan Stanley bullish on domestic banks, expecting them to undergo re-rating soon. “Large private banks have emerged stronger post-crisis – balance sheets are strongest ever, and growth/market share is accelerating,” analysts at Morgan Stanley said in a note.

Valuations re-rating ahead

Valuations have been a key talking point on Dalal Street after the massive rally in equities in the last few months. However, Morgan Stanely said that significant valuation re-ratings could be just ahead for leading lenders. “Profitability is high, helped by a strong improvement in loan spreads in recent years as well as lower tax rates. Consequently, we expect return ratios to reach or cross previous cycle peaks,” they said. After having raised capital and turned severely risk-averse during the pandemic, balance sheets at private banks are the best ever in terms of capital, provisions and liquidity. 

Strong growth expected

Earlier, it was expected that banks would see high NPAs after RBI’s moratorium ended. “However, the trends surprised positively – impaired loan formation was 1.8-2.4% in F9M21 against 1.7-3.4% F9M20,” the report said. Collection efficiency has been good across leading banks, now back at pre-covid levels. Slippages are expected to moderate in the fiscal year 2022. The global investment bank said that any slippages would be managed easily owing to healthy provisioning. 

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With asset quality now stable, and improvement in business, growth is likely to accelerate for large lenders. “We expect growth to remain strong as retail banking has picked up well; while corporate/SME may recover relatively lower, there are significant market share gain opportunities for large private banks, in our view.”

Target price

Morgan Stanley is overweight on ICICI Bank, HDFC Bank, Axis Bank, and IndusInd Bank. For ICICI Bank the taget price has been revised 13% higher to Rs 850 per share, while HDFC Bank’s target price is also up 13% to Rs 2,000 apiece. For Axis Bank, Morgan Stanley has a target price of Rs 1,000, and for IndusInd Bank, it has been increased to Rs 1,225.