HDFC Bank, ICICI Bank, Axis Bank shares may rally up to 42%; Morgan Stanley sees banking recovery

Morgan Stanley expects a gradual macro recovery likely to weigh on growth and the NPL cycle

BSE Bankex has underperformed the BSE Sensex in the past five months due to a lack of clarity around non-performing loans (NPL) cycle. From March 24, when Indian share markets crashed due to weak global cues on the back of the coronavirus pandemic, S&P BSE Sensex has rallied 51.49 per cent, while S&P BSE Bankex index has managed to gain 38.26 per cent. Despite this, Morgan Stanley expects the banking system to recover gradually and earnings to normalise for HDFC Bank, ICICI Bank and Axis Bank over the next 12 months. Considering the market share of large private banks across key retail segments, Morgan Stanley sees enough scope for them to gain market share as the economy stabilises. In its view, a few other factors such as weak competition, improving funding franchises and strong digital capabilities will also help.

Large private banks shares to surge up to 42%

Morgan Stanley has raised its price target on three large private banks with a potential upside of up to 42 per cent. The brokerage firm has maintained its overweight rating to all three stocks. “We raise PTs at large private banks, led by valuation roll forward and lower risk weights – ICICI Bank and HDFC Bank remain our top picks,” it said. Morgan Stanley raised its target price on ICICI Bank to Rs 525, from Rs 505 earlier, which is a 4 per cent change. It will take ICICI Bank to jump 41.71 per cent to achieve the target pegged by the brokerage. Similarly, hiking its target price by 4 per cent on Axis Bank too, Morgan Stanley has given Rs 600 as a revised target, as compared to Rs 575 earlier. The brokerage firm sees 34.18 per cent upside in the stock. While For HDFC Bank, it has revised its target price by 2 per cent. The new target price for the private lender is Rs 1,450, from Rs 1,425 previous. From the previous close level, the stock will have to jump 32.92 per cent to touch the target price pegged by Morgan Stanley.

For HDFC Bank, it has a target price of Rs 1,590 in the base case, Rs 790 in the bear case and Rs 1,945 in the bull case. For ICICI Bank it pegged the price target of Rs 560 in the base case, Rs 300 in the bear case and Rs 875 in the bull case. While, for Axis Bank, it set a target price of Rs 625 in the base case, Rs 355 in the bear case and Rs 1,170 in the bull case.

Rising COVID-19 cases likely to weigh on growth

Morgan Stanley expects a gradual macro recovery likely to weigh on growth and the NPL cycle. Indian economy had slowed significantly even prior to COVID-19 and was going through a significant credit crunch. The report highlighted that COVID-19, against this backdrop, will weigh on a quick growth recovery and the NPL cycle. While India has experienced a relatively high recovery rate/low death rate from COVID-19, new cases continue to rise and will likely weigh on the growth momentum. It expects India banks to see gradual loan growth recovery of 3 per cent in FY21 and 8 per cent in FY22 and material coronavirus-led new impaired loan additions.

HDFC Bank, ICICI Bank, Axis Bank hold strong balance sheets

As far as large private banks are concerned, in one-year absolute performance Axis Bank has delivered a negative return of 33 per cent while on a year-to-date (YTD) basis, it fell 41 per cent. HDFC Bank stocks lost 3 per cent in one year and dropped 14 per cent on YTD. ICICI Bank stocks declined 6 per cent in one year and 31 per cent on YTD basis. The research firm has had a positive view on large private banks given their strong balance sheets, which has further strengthened post the recent capital raises. “Moreover, the bulk of their lending in recent years has been to either highly rated corporate borrowers or to prime retail customers with existing liability relationships, implying relatively lower asset quality hits, unlike the bulk of the banking system,” it added.