Morgan Stanley bullish on large private banks vs others amid attractive valuations

Morgan Stanley believes large private sector banks are better positioned to navigate the current cycle

Morgan Stanley, in its recent note, has issued a series of updates on Indian banks, suggesting investors to shift to large private banks over state-owned and mid-sized private banks. They emphasise the 'time to get selective' as strength of franchise will drive divergence in profitability.

The firm has downgraded Federal Bank to 'Underweight' from 'Equal-Weight,' with a reduced target price of Rs 185 per share from Rs 200 per share. Similarly, RBL Bank's target has been slashed to Rs 210 per share from Rs 260 per share, with the 'Underweight' rating reiterated.

Among the large private banks, ICICI Bank, Kotak Mahindra Bank, and Axis Bank remain Morgan Stanley's top picks, albeit with marginal target cuts. For public sector banks, analysts have taken a cautious stance as State Bank of India (SBI) and Bank of Baroda have been maintained at 'Equal-Weight,' with their target prices reduced to Rs 800 per share and Rs 265 per share, respectively.

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Meanwhile, Punjab National Bank (PNB) too has been downgraded to 'Underweight' with a target cut to Rs 73 per share. Besides, Bank of India and Canara Bank also face 'Underweight' ratings, with their targets reduced to Rs 110 per share and Rs 83 per share, respectively.

Morgan Stanley believes large private sector banks are better positioned to navigate the current cycle and are likely to see higher relative valuations. They highlight a significant trade-off between growth and profitability at state-owned banks, while mid-sized private banks are seen as structurally more challenged due to high competitive intensity.

As a result, the firm recommends shifting further away from State-Owned Enterprise (SoE) banks and mid-sized private banks in favor of large private sector banks.

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