India’s large private banks now stronger, entering ‘a golden age’; Morgan Stanley prefers these stocks

Risk-averse investors were seen shying away from India’s banking sector earlier this year when the coronavirus aided lockdown had just been imposed. With businesses unable to operate, unless essential, it was expected that non-performing assets of already stressed lenders would grow. However, as we near the end of 2020, and gear up to enter 2021, the story is quite different. Global brokerage and research firm Morgan Stanley now believes that large Indian private banks are now entering ‘a golden age’. 

A Multitude of factors are now working in favour of the large private banks in India. “Large private banks have emerged stronger out of the COVID crisis – they have strengthened capital, built excess provisions and have improved liquidity positions,” the report said. India’s macroeconomic outlook has turned more positive since the end of the previous quarter and is only expected to strengthen going forward. High frequency indicators are charting a V-shaped recovery with growth expected to turn positive this quarter.

Lenders have raised capital in 2020 aggressively as they geared up to battle the pandemic. “We believe the current stock of provisions at large private banks are enough, and will help them normalize credit costs in H1-F22,” analysts at Morgan Stanley said.

India’s largest private sector lender HDFC Bank has a target price of Rs 1,700 with an ‘Overweight’ rating. In the bull case scenario the target price may go as high as Rs 2,135 per share. HDFC Bank has a strong funding franchise and has continued to gain market share. “Despite slowdown related to the Covid-19 outbreak, loan growth has continued to outperform given strong branch expansion/digital capabilities and market share gains. Asset quality is robust given strong underwriting capability and lending to prime borrowers across segments – this has been helping the bank outperform even during the pandemic,” the report said.

ICICI Bank too has an ‘Overweight’ rating from Morgan Stanley, expecting a re-rating cycle ahead for the private sector lender. Continuing the trend among banks, ICICI Bank has managed to beef up capital and has accelerated its deposits market share further. “Despite slowdown related to the Covid-19 outbreak, loan growth has continued to outperform given strong branch expansion/digital capabilities and market share gains. Asset quality is robust given strong underwriting capability and lending to prime borrowers across segments – this has been helping the bank outperform even during the pandemic,” the report said. The base case target price for ICICI bank is Rs 735 per share, while the bull case target is of Rs 1,055 apiece.

The third private sector bank in the list is Axis Bank. Attractive valuations and improving profitability have been cited as the reasons behind ‘Overweight’ rating. Asset quality of the bank is expected to improve further along with loan growth. “We believe that the bank is well placed for credit cost normalization in F22 unless the economic environment deteriorates sharply,” Morgan Stanley said. Base case target price for Axis Bank is Rs 780 while the bull case target is Rs 1,375 per share.