Large Private Indian Banks Entering ‘Golden Age’: Morgan Stanley

Morgan Stanley has upgraded its outlook by 13% for large private sectors banks in India. The global brokerage firm believes that the sector will witness next leg of re-rating cycle as the debate in Indian banks has quickly shifted from impaired loans to growth.

Large private banks have emerged stronger post-crisis as balance sheets are strongest ever, and growth/market share is accelerating, said Morgan Stanley in its report Large Private Banks: Entering Golden Age – Next leg of Rerating Cycle.

The global brokerage firm expects 20-30% upside in ICICI Bank, HDFC Bank, Axis Bank & IndusInd Bank. As it of the opinion that this cycle is very similar to the one in the early 2000s. Balance sheets of banks are the best in terms of capital, provisions and liquidity. And this will help them gain market share at an accelerated pace; incremental loan market share of three large private banks was more than 70% in 9MFY2021 vs. less than 25% market share on a stock basis. Profitability is high, helped by strong improvement in loan spreads in recent years as well as lower tax rates.

ICICI Bank a substantive re-rating cycle ahead

With cyclical headwinds subsidising Morgan Stanley believes the stock will re-rated as management has built provisions aggressively and accelerated deposit market share. At the same time, COVID-19 has catalysed digital adoption, and ICICI has capitalised on this. The balance sheet is strong and sees the bank as very well positioned for the upcoming cycle.

In the bull case, the brokerage has raised its target to Rs 1,275 owing to a sharp rebound in economic growth.

For the base case, the price targets are revised to Rs 850. And for this, it has assumed loan growth at 11% in FY2021 before recovering to 17% in FY2022 (10% in FY2020). Margins moderate ~10 basis points in FY2021 and then pick up ~30 basis points over the next two years to 3.9%. Credit costs are elevated at around ~235 basis points in FY2021, driven mainly by the impact of COVID-19, but improve to ~120 basis point in FY2022.

While in the bear case scenario, the brokerage raised its target to Rs 420 assuming sharp resurgence in COVID-19 cases leading to higher-than-expected weakness in the economy.

HDFC Bank strong growth and improving profitability at an attractive valuation

Driven by strong funding franchise with continued market share gains in low-cost deposits and robust asset quality across segments Morgan Stanley is overweight on the stock and have raised price targets upwards.

For the bull case scenario, the brokerage has raised its target to Rs 2,450. This assumes loan growth improves sharply, margins expand in FY2022 helped by an increase in the share of high-yielding loans and faster than expected improvement in loan to deposit ratio.

In the base scenario, the targets are revised to Rs 2,000 with expectations of loan growth moderating to 15% in FY2021 before recovering to 17% in FY 2022. Margins moderates by 5 basis points FY 2021 and then remain broadly stable thereafter. Credit costs moderate to 120 basis point in FY 2022 and 110 basis point in FY 2023.

For the bear case scenario, it has kept a price target of Rs 1,200 and assumes sharp resurgence in COVID-19 cases leading to higher-than-expected weakness in the economy.

Axis Bank strong balance sheet

Propelled by bank’s ability to aggressively improve its coverage on stressed loans and potential to drive strong revenue growth, led by market share gains as the economy stabilizes Morgan Stanley is overweight on Axis Bank.

In the bull case scenario, the price target is raised to Rs 1,695 due to quick capex recovery and benign inflation trends.

For the base case scenario, the target is revised to Rs 1,000 as the loan growth moderates to 6% in FY2021 before recovering to 15% in FY 2022. Margins stabilize in FY 2021 before expanding 15-20 basis point in F2022 to 3.7%.

In the bear case scenario, the targets are raised to Rs 495 with assumptions of impaired loan formation is higher than expected, driven by high slippages from SME loans and retail loan book.

IndusInd Bank long-term compounding story

The global brokerage firm believes IndusInd Bank is well-positioned over the medium term on the back of strong capital, well-diversified loan book & revenues with an increasing share of the retail franchise.

In the bull case scenario, the price target is raised to Rs 2,030. For this it assumes loan growth improves sharply, owing to a sharp pickup in the macroclimate and higher-than-expected benefits from digitization. Margins expand in FY 2022 helped by an increase in the share of high-yielding loans & improvement in retail liability franchise.

For the base case scenario, the targets are revised to Rs 1,225 as loan growth remains muted in FY2021 at 5% and accelerates to 15% in FY2022. Margins are broadly stable over the next two to three 3 years at 4.15-4.20%.

While in the bear case, the price targets are raised to Rs 550 due to resurgence in COVID-19 cases leading to higher-than-expected weakness in the economy.

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