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The higher interest rate trajectory, based on the position of Indian economy, amid NBFC turmoil is likely to improve large banks' positioning even more, Morgan Stanley said in a note.
These banks were doing well, but liquidity advantage should fuel further acceleration in Pre-Provision Operating Profit (PPOP) growth.
In the large banks space, the global investment bank prefers ICICI Bank, HDFC Bank, State Bank of India and Axis Bank which could give 30-40 percent return in the next 12 months. Morgan Stanley turns underweight on Yes Bank and RBL Bank, and 'equal weight' on AU Small Finance Bank.
Interest rates have been rising in India for some time now, which drove our preference towards banks with strong liquidity, added the Morgan Stanley note. However, the IL&FS default and subsequent pressure on NBFCs ia likely to make this shift quicker and starker.
Funding cost for wholesale funded institutions is increasing — which will hamper margins and growth and potential asset quality.
State-owned banks (SOE) have excess liquidity but are unable to lend given low capital. The big winners are likely to be large private banks, which were constrained by liability growth trailing asset growth, highlighted the note.
However, Morgan Stanley expects more liquidity to flow to these banks in the current setting. The RBI's recent move on LCR also helps in liquidity.
SOE banks have liquidity and could benefit if growth capital is infused. Apart from NBFCs, mid-sized or small banks will face higher funding cost and slower growth, which is not priced in.
Morgan Stanley raised its F19-21 PPoP CAGR forecast for large banks to 24 percent from 21 percent earlier, which is 10-15 percent above consensus. It expect large banks such as HDFC Bank, ICICI Bank, SBI and Axis Bank to accelerate loan growth and improve spreads (both assets and liabilities) over the next three years.
The large corporate lenders showed a decline in PPoP market share to 29 percent. However, given the above backdrop and increased focus on retail, Morgan Stanley expects their PPoP market share to rebound to 32 percent over the next three years.
Morgan Stanley reduced earnings estimates by 5-15 percent for mid-sized banks. Higher funding costs will affect growth, which is not implied in current stock prices.
Yes Bank: Downgrade to underweight from equal weight:
Morgan Stanley reduced earnings estimates further. Weak capital should affect loan growth and fee income growth progression over the next couple of years.
RBL Bank: Underweight on RBL Bank:
Morgan Stanley reduced earnings estimates given higher funding costs. Valuation is not cheap at 2.8x F19e book for 13 percent RoE. As rates move up, potential improvement in profitability could be delayed, affecting growth and hence ability to raise capital at premium valuations.
AU Small Finance Bank: Move to Equal Weight (EW):
Morgan Stanley moved AU Small Finance Bank to EW in view of concerns and an expensive valuation. The global investment bank is concerned with the relatively high pace of capital consumption and rising share of wholesale lending.
“We have also reduced earnings estimates given higher funding cost and a fixed-rate lending book (75 percent). Valuation at 28x F20e earnings is not attractive against this backdrop,” said the report.
Kotak Mahindra Bank: Equal Weight
Morgan Stanley expects a strong PPoP growth outlook, but valuations at 3.3x F20e PPoP is already pricing this in.
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