In its report titled Indian Financials--Staying Maximum Bullish, Morgan Stanley says the banks will cut deposit rates by 100 bps over the next 12 months since real deposit rates are unlikley to stay above 150 bps. Indian private lenders are all set to see a growth.
Morgan Stanley strongly believes private lenders are poised to see a golden age going forward. This bullishness was further bolstered by the Reserve Bank of India’s mid-cycle rate cut. In its report titled Indian Financials--Staying Maximum Bullish, Morgan Stanley says the banks will cut deposit rates by 100 bps over the next 12 months since real deposit rates are unlikley to stay above 150 bps. The reports says deposit rates in india will decline to as low as 6.5 pecent from the current 8.5 percent, which would be great for bank stocks.
The bullish view on private banks has been premised on:
1. Peaking of bad loan cycle: The report says the peak of the bad loan formation cycle is past. Although bad loan formation is still high, a steep decline from F1Q16 onwards can be expected once the RBI stops allowing fresh restructurings. Provisioning will stay high for banks with low coverage – but those with good coverage of bad loan (private banks) will start showing meaningful declines in provisioning.
2. Sharp revenue pickup at private banks: For the next two years, banks will see a loan growth of 13-15 percent per annum and once the capex cycle picks up, it will grow further. "For the next two years, while system loan growth is likely to be 13-15 percent per annum, we expect private banks to post 23-25 percent growth as SOE banks struggle to grow given weak capital levels. Given the dearth of such strong growth (with high ROEs) elsewhere in the world, we expect private bank stocks to remain attractive."
3. Valuations are attractive: Private bank P/Es are at mid-cycle averages. As earnings growth and profitability stays strong, a re-rating is expected.