Morgan Stanley wary on financial sector, downgrades PSBs

The Morgan Stanley report has downgraded PSU banks. CNBC-TV18's Avni Raja reports more.

Morgan Stanley's report has downgraded PSU banks and has moved to a cautious view on the Indian financial services sector. They have cut ratings on banks like State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), Bank of India (BOI) and Canara Bank to underweight. They have gone down neutral weight on Union Bank, Corporation Bank and Oriental Bank of Commerce. They expect the revenues to slowdown and stock performance to dampen over the next two-three quarters.
However, the top picks remains ICICI Bank and HDFC Bank. They expect NIMs to further decline by 40 to 70 bps going forward. Due to the hike in funding cost and because banks have raised their deposit rates aggressively, most of the lending rates have already been reflected in the NIMs.
Banks will also see a reprising of the deposit costs. The difference between deposits rolling off and the new deposits coming in could be as much as 300 bps. Banks are already running close to highest levels seen in the last couple of years.
If lending rates are hiked, then loan growth will slow as well as the asset quality could get impacted. Morgan Stanley report says that asset quality is another area where we need to watch out that it will be weaker than what is expected.
They expect single digit growth in the pre-provisioning operating profits. They have reduced earnings forecast by 1% to 5% for various banks for FY12 and FY13.