Strong earnings to drive large private lenders ahead of PSU banks: Morgan Stanley's Sumeet Kariwala

Sumeet Kariwala, Executive Director of Financials Equity Research at Morgan Stanley

The Indian banking sector is in early stages of a strong upcycle, supported by normalisation of credit costs, steady loan growth, and expected healthy earnings trajectory, said Sumeet Kariwala, Executive Director of Financials Equity Research at Morgan Stanley. Out of the banking pack, Kariwala preferred large private lenders over state-owned banks from a long-term perspective.

"The valuation gap between private lenders and PSU banks have come off in recent days. But if viewed in terms of earnings growth trajectory, we expect basket of private sector lenders to surprise better than PSU banks," he said in a conversation with Moneycontrol.

However, he also added that the PSU banking stocks have more catch-up left as valuations remain attractive, supported by strong macro-economic indicators.

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At a time when the banking sector was struggling to maintain healthy margins due to rising cost of funds, Kariwala expects some normalcy over the upcoming 2-3 quarters. "We expect the pace of deposit rates to be slower than earlier, eventually trickling some margin expansion. However, since we are not assuming any rate cuts to materialise this year, term deposits is expected to re-price higher," he added.

Answering question on the Reserve Bank of India's (RBI's) crackdown of unsecured retail lending, Kariwala said that there has been some meaningful moderation of unsecured loans by the banking sector.

"If you see at fiscal year 2023-24, there was a sharp growth in unsecured retail lending due to Covid-19 shocks and low base. But the current scenario has changed. We are now seeing moderation of unsecured lending taking place across banks, NBFCs, fintechs, and other financial institutions. Hence, this a good sign and we are not really worried about unsecured loan growth at a system level," Kariwala said.

Overall, Kariwala remains positive on the banking sector as normalisation of credit costs and margin stability will help grow earnings over the next 2-3 quarters. Moreover, he expects 14-15 percent loan growth to sustain in the long-term, but stayed watchful of deposit trends.

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