Large private banks are close to growing big in stature, given higher interest rates and chaos in the non-banking financial companies (NBFC) space, says Morgan Stanley.
Rates have been rising in India for some time, which drove its preference towards banks with strong liquidity, said the global financial services firm. However, the IL&FS default and subsequent pressure on NBFCs is likely to make this shift quicker and much starker. Funding cost for wholesale funded institutions is increasing – which is seen to hamper margins and growth and potential asset quality.
The global financial services firm further said state-owned enterprise (SOE) banks have excess liquidity, but are unable to lend, given their low capital. The big winners are likely to be large private banks, which were constrained by jump in liability trailing asset growth.
“We expect more liquidity to flow to them in the current setting. The RBI’s move on LCR also helps release liquidity. SOE banks have liquidity and could benefit if growth capital is infused. Apart from NBFCs, mid-sized or small banks will face higher funding cost and slower growth, which is not priced in,” Morgan Stanley said in a report.
Morgan Stanley also raised its F19-21 pre-provision operating profit (PPoP) CAGR forecast for large banks to 24 per cent, from 21 per cent.
“We expect large banks – HDFC Bank, ICICI Bank, State Bank of India and Axis Bank – to accelerate loan growth and improve spreads (both assets and liabilities) over the next three years. The large corporate lenders 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, we expect their PPoP market share to rebound to 32 per cent over the next three years,” the brokerage house said.
Morgan Stanley is ‘overweight’ on ICICI Bank, HDFC Bank, State Bank of India and Axis Bank with a target price of Rs 460, Rs 2,550, Rs 350 and Rs 800, respectively. It downgraded AU Small Finance Bank to ‘equal weight’ from ‘overweight’ and revised target price to Rs 595 from Rs 875 earlier. It also downgraded RBL Bank and YES Bank to ‘underweight’ from ‘equal weight’ with a revised target price of Rs 450 (Rs 675 earlier) and Rs 175 (Rs 225 earlier), respectively.
As for YES Bank, Morgan Stanley said, “We reduce earnings estimates further. Weak capital should affect loan growth and fee income growth progression over the next couple of years.”
Source: Economic Times