Large private sector banks in India are well-positioned and look set to dominate the Indian financial industry going ahead, feels Morgan Stanley.
The global financial services firm noted in its research report that the changing industry dynamics, viz higher rates and NBFC turmoil are set to improve large banks' positioning even more. That apart, better retail funding bases and digitisation initiatives are other key favourables for large banks.
These banks were doing well, but liquidity advantage should fuel further acceleration in PPoP (pre-provision operating profit) growth, it said.
Pre-provision operating profit (PPOP) is the amount of income a bank or similar type of financial institution earns in a given time period, before taking into account funds set aside to provide for future bad debts, explains Investopedia.
"We have been very positive on large banks and more recently on the corporate lenders as well, given our view that the NPL cycle is turning. One of the key areas of investor pushback has been whether there can be sustained re-rating of these corporate lenders after credit cost normalization. Our view is that a sustained re-rating will be driven by revenue growth, and we are getting increasingly confident about this, led by a change in liquidity dynamics," MS said.
HDFC Bank, ICICI Bank and Axis Bank are Morgan Stanley's top picks. These lenders are expected to accelerate loan growth and improve spreads (both assets and liabilities) over the next three years. The large corporate banks showed a decline in PPoP market share to 29 per cent (from 32 per cent five years ago). However, given the above backdrop and increased focus on retail, their PPoP market share is likely to rebound to 32 per cent over the next three years.
The firm sees 46 per cent upside in ICICI Bank stock to Rs 460 while Axis Bank’s target price is set at Rs 800 (up 42 per cent). SBI and HDFC Bank are likely to see an upside of 34 and 30 per cent at Rs 425 and Rs 2,550, respectively. (All prices taken as of Friday’s close).
On the other hand, it has downgraded YES Bank to underweight from overweight saying weak capital should affect loan growth and fee income growth progression over the next couple of years. It has also reduced the earnings estimates for RBL Bank on the back of higher funding costs and moved the stock to 'underweight.'
The firm also noted that state-owned banks have excess liquidity but are unable to lend given low capital. They too stand to benefit from the changing situation if growth capital is infused, it feels. The only large public sector bank it is overweight on is State Bank of India (SBI).