While loan impairments in the system were going up, the private banks had enough profitability and capital as a buffer. Also, price-earnings multiples were inexpensive, says Morgan Stanley
Big private lenders – HDFC Bank, HDFC, ICICI Bank and Axis Bank – have been attractive investments for the last few months. Morgan Stanley’s view, in a research note, was that while impairments in the system were going up, these lenders had enough profitability and capital to buffer them. Also multiples were inexpensive. At the same time, there have been concerns about the impact of the bad loan cycle on other banks, especially SOE (state-owned enterprises) banks and niche non-bank lenders.
However, now the economy is stabilising and systemic risk from external factors has reduced, finds Morgan Stanley. Also, with LD (loan-deposit) ratios at around 77%, the liquidity situation is better. Against this backdrop banks will do well. “We are thus putting OW (overweight) on almost all private lenders”, says Morgan Stanley. The view on SOE banks remains the same, i.e. profitability is too low to take care of high credit costs. Also, the SOE banks face a substantial capital raising cycle – implying material dilution ahead for minority investors.
Morgan Stanley raises its view on the India Financials industry to Attractive. It believes that the industry is poised to give very strong returns. The stocks have lagged the broad market over 1-year and 3-year periods, driven by concerns of economic slowdown and consequently the bad loan cycle. As they recede, multiples for private lenders with strong capital should expand.
The performance of banks in the stock market is shown in the chart below:
The key forecasts with respect to private lenders is summarised in the table below:
In conclusion, the Morgan Stanley research note recommends profitable private lenders in the stock market to long term investors.
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