Cyclical tailwinds to drive further re-rating in PSU banks; prefer BOI, BoB: Morgan Stanley
Morgan Stanley strategists feel that the state-owned banks have done well, and expect continued strong performance helped by higher margins, sustained loan growth and improving operating leverage over the next few years.
"Over the past two years, Indian banks have seen sharp moderation in new NPL (Non-Performing Loan) formation, which, coupled with increased NPL coverage during COVID, has resulted in sharp moderation in credit costs. In recent quarters, this has been followed by sharp improvement in margins, helped by a rising rate cycle - higher rates, coupled with retail funded balance sheets and higher shares of repo-linked loans, have led to up-front margin expansion in the current cycle. Loan books have yet to be fully repriced, which implies that margins might expand further before, then moderate in F24," the global research firm said in a report.
Catch all the market action on our live blog"We expect loan growth to be sustained and credit costs to remain benign over the next few years. We expect current loan growth to be sustained as capex spending accelerates. The capex cycle should, in turn, foster job
creation, accelerate income growth, and drive more growth opportunities even in the retail and SME segment," it said.
"Against this backdrop, we expect the credit cycle to remain benign and see credit cost undershooting over the next few years," it said.
While the strategists believes that the State Bank of India (SBI) remains the best state-owned bank, they see potential for notably higher stock returns in Bank of India and Bank of Baroda due to much cheaper valuations. "We have raised earnings estimates and valuation multiples for non-SBI state-owned banks as we expect continued strong cyclical tailwinds."
At SBI, the research firm had already built these benefits given a better balance sheet and execution over past two years. As the cyclical recovery is sustained, it expects benefits to percolate to non-SBI state-owned banks as well. "We compare these banks on capital, asset quality, profitability and liquidity. Bank of India and Bank of Baroda offer the best risk reward, followed by SBI," Morgan Stanley said.Disclaimer: The views and investment tips expressed by experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.