SBI To Federal Bank: Morgan Stanley Sees ‘Second Leg Of Rerating Cycle’; Lists Top Picks
Morgan Stanley has raised estimates and price targets for all banks in its coverage, except IDFC First Bank.
Strong balance sheets, lessening macro concerns and improving capacity utilisation set the stage for a capex upcycle in FY24-FY25, which could drive a second leg of rerating at Indian banks, according to Morgan Stanley.
The research house, according to its Sept. 6 note, raised estimates and price targets for nearly all banks in its coverage, barring IDFC First Bank Ltd. Target prices were raised between 5% and 21%.
Bank stock rerating cycles work in two legs and Indian banks appear to be in a transition phase between the two, Morgan Stanley wrote.
“The first leg is usually driven by expectations around better asset quality. As tail risks recede, stocks improve sharply to normalised multiples—this has already occurred over the past two years,” it said. “The second, more sustained, leg is usually driven by loan growth acceleration that sets an earnings upgrade cycle, and catalysts for this are falling into place.”
“Our macro team sees a new leg of investment upcycle led by improving trends in capacity utilisation rates, in addition to corporate profitability and deleveraged banking sector balance sheets,” Morgan Stanley said.
According to the monthly data released by the Reserve Bank of India, bank credit in July rose at its fastest pace in three years, helped by retail loans and services credit.
On a monthly basis, retail loans and services credit led lending growth, and credit to industries expanded 10.5%.
The research house said it expects competitive intensity in retail deposits to reach a new high in the upcoming upcycle. “LCR regulations and bank mergers would intensify competition. Large banks—both private and state-owned—stand out, and appear better placed to accelerate loan growth and gain share. We raise valuation multiples to reflect improved growth and profitability outlooks over the next few years.”
It listed ICICI Bank Ltd., Axis Bank Ltd., Bank of Baroda and State Bank of India as preferred picks. “We scan for stocks that are not fully pricing in a growth upcycle, have access to retail deposits and high liquidity, and appear well equipped to accelerate market share gains as the macro outlook improves.”
It remains selective on mid-sized banks, with a preference on Federal Bank and AU Small Finance Bank Ltd.
Morgan Stanley also listed a few key risks to its bullish call on Indian banks:
Weaker-than-expected external demand weighing on growth acceleration.
Slower-than-expected acceleration in deposit growth.
Greater-than-expected competitive intensity.