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    Indian banks set for second leg of re-rating, says Morgan Stanley

    Indian banks set for second leg of re-rating, says Morgan Stanley

    Indian banks set for second leg of re-rating, says Morgan Stanley
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    By CNBCTV18.COM IST (Published)

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    Morgan Stanley expects Indian banks to have another leg of re-rating. Find out what stocks is it betting on.

    India's banks are set for another round of re-rating as catalysts for the same are falling into place, according to Morgan Stanley. The brokerage firm expects accelerated capex to contribute to sustained loan growth.
    "Strong balance sheets, lessening macro concerns, and improving capacity utilisation set the stage for a capex up-cycle in FY24-25, which we think could drive a second leg of re-rating at Indian Banks," Morgan Stanley said in its note.
    The firm said Indian banks are in a transition phase between the two phases of a re-rating cycle. Loan growth estimates were raised for FY24 and FY25. Morgan Stanley also expects lower credit costs to drive upgrades to its earnings estimates and higher return on equity assumptions.
    Morgan Stanley expects competitive intensity in retail deposits to hit a new high in the upcoming cycle. Private banks are turning aggressive after lagging in retail market share earlier. "Large banks, both private and SoE, stand out, in our view, and appear better placed to accelerate loan growth and gain market share," the brokerage wrote in its note.
    Among its top stock picks within the sector, Morgan Stanley sees ICICI Bank, Axis Bank, Bank of Baroda, and State Bank of India to be well placed to capitalise on the upcoming growth cycle. Among mid-sized banks, the firm lists Federal Bank and AU Small Finance Bank as its preferred picks. The firm sees a potential upside of 30-40 percent each among its top picks.
    It highlights weaker-than-expected external demand weighing on growth acceleration, slower-than-expected deposit growth and greater-than-expected competitive intensity as some of the key risk factors.
    Here's how Morgan Stanley views its top picks:
    ICICI Bank
    • Rating: Overweight
    • Price Target: Raised to Rs 1,225 from Rs 1,047
    • Expect loan growth to improve to 20 percent in FY23
    • Expect credit costs to normalize to 69 basis points in FY23 and 73 basis points in FY24, compared to 106 basis points in FY22
    • Axis Bank
      • Rating: Overweight
      • Price Target: Raised to Rs 1,000 from Rs 910
      • Strong balance sheet and improving profitability
      • Reported margins to improve by 20 and 10 basis points in FY23 & FY24 respectively
      • Credit costs to normalise from FY23 onwards
        • Rating: Overweight
        • Price Target: Raised to Rs 675 from Rs 620
        • Continue to apply 20 percent holding company discount to subsidiares' valuation
        • Retail franchise has improved and corporate cycle is turning
        • Expect further re-rating as PPoP (Pre-provision operating profit) growth accelerates
        • See upside risks to earnings from higher margins
          • Rating: Overweight
          • Price Target: Rs 170 from Rs 155
          • Best risk-reward among SoE banks covered
          • Expect margin expansion mainly led by lower slippages and higher rates
          • Raise earnings estimates as a result of higher core PPoP growth
          • Federal Bank
            • Rating: Overweight
            • Price Target: Raised to Rs 155 from Rs 130
            • Earnings upgrade cycle is underway
            • Well placed to outperform peers on margins
            • Risk-reward remains attractive
            • AU Small Finance Bank
              • Rating: Overweight
              • Price Target: Raised to Rs 875 from Rs 825
              • Expect multiple years of strong growth with high profitability
              • Impaired loan ratio relatively high but we expect a recovery
              • Should benefit from strong growth off a small base
              • Valuations are attractive
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