Large private banks are entering a “golden age,” says Morgan Stanley

Morgan Stanley raised its outlook and price targets for banks as it expects the sector, particularly large private lenders, to continue rebounding in 2021 due to higher revenues and lower borrowing costs.

Large private banks have emerged stronger from the Covid-19 crisis as they strengthened their capital, built up excess provisions and strengthened their liquidity positions, said Morgan Stanley in its forecast for 2021 entitled “Large Private Banks – Entering a Golden Age”. “A combination of these factors will help them gain quick market share and significantly lower cost / income ratios over the next few years.”

Most estimates suggest that asset quality in the banking sector will come under pressure again after the six-month moratorium on credit in August. In this sector, particularly among private lenders, non-performing loans have not increased as much as feared. In addition, these lenders raised funds to increase the capital buffers.

Morgan Stanley expects a potential increase of 25-40% at current levels for large private banks, with ICICI Bank Ltd. and HDFC Bank Ltd. the top picks are.

The broker upgraded Kotak Mahindra Bank Ltd. however, despite similar tailwinds and an estimated CAGR of 22% of earnings versus FY 21-23, down from “overweight” to “equilibrium”. “At a profit of 26x GJ23E, this is largely priced in,” the release said, adding that it is waiting for a better entry point for the lender.

Morgan Stanley also expects further increases in profits for the banks. One caveat here is that the macro recovery must be sustained, which is reflected in the high frequency indicators, and that interest rates should remain harmless.

For medium-sized banks, Morgan Stanley expects a cyclical increase in profits. After the rescue of Yes Bank Ltd. and a decline in deposits in the fourth quarter of fiscal 20 was an additional challenge. However, according to the note, growth has improved a lot over the past two quarters.

“The expansion of the state loan guarantee system will further help alleviate stress on asset quality,” the statement said. Morgan Stanley expects borrowing costs at such banks to normalize in the second half of fiscal year 22-23. “We expect these banks to further narrow the gap with large private banks over the next year.”

Main Risks Highlighted by Morgan Stanley

  • Above-expected non-performing loans for SMB / BBB and undervalued segments.
  • Slower than expected.
  • Sharp resurgence in Covid-19 cases.
  • Higher than expected competitive intensity, which affects margins.