This scenario, they say, is not priced-in which could push share-prices upwards by 30-40 per cent over the next 12-15 months.
Among the key growth drivers, recent capital raise by the banks gives analysts at Morgan Stanley
comfort from NPA absorption view point. Assuming threshold capital level at 10-12 per cent, the brokerage’s analysis points out that the said banks are best placed to absorb bad loans up to around 13-16 per cent of loans.
Second, Morgan Stanley deduced that these banks will likely see a 3-5 per cent increase in impaired loans due to Covid-19. “The bulk of their lending in recent years has been to either highly rated corporate borrowers or to prime retail customers with existing liability relationships... Moreover, we note that large banks have built aggressive provisions over the past few quarters... Therefore, these banks are much better placed compared to mid-size banks/public banks,” it said.
On the issue of weak loan growth due to a muted macro environment, Morgan Stanley expects ICICI, HDFC and Axis Bank
to do better than peers.
“FY21 will be tough but we see loan growth at 4 per cent YoY for Axis/ICICI Bank
and 12 per cent for HDFC Bank.
We expect loan growth to recover to a 15-18 per cent run-rate for the large private banks by end-F22,” it says.
That apart, analysts at the brokerage expect net interest margins to bottom in H2F21, for the banks under consideration, driven by peak NPA slippages, and bottoming-out of loan to deposit ratio. Add to it, they expect pre-provision operating profit (PPoP) margins to bottom out in H2FY21 largely driven by higher liquidity on the balance sheet, and pressure on loan spreads.
“Over the past few years, weak competition from private banks has led to strong improvement in credit spreads across retail product segments. This, coupled with reduced risk weights and increasing share of internal loan originations, has led to sharp improvement in return on equity (RoEs). As the loan market share continues to consolidate in favour of large private banks, we expect profitability to continue to improve,” it observes.
Lastly, Morgan Stanley believes the valuations look attractive as they remain 10-40 per cent below mean levels.
It has a target price of Rs 1,450 on HDFC Bank
(Rs 1,590 in base case; Rs 790 in bear case; and Rs 1,945 in bull case). ICICI Bank
commands price target is Rs 525 (Rs 560 in base case; Rs 300 in bear case; and Rs 875 in bull case), while Rs 600 is set for Axis Bank
(Rs 625 in base case; Rs 355 in bear case; and Rs 1,170 in bull case).
At the bourses, the stocks of these banks have underperformed on the BSE thus far in the calendar year 2020, ACE Equity data show. While the stock price of Axis Bank
has crashed 41 per cent; that of ICICI Bank
and HDFC Bank
has tumbled 31 per cent and 14 per cent, respectively. In comparison, the S&P BSE Sensex has slipped 6 per cent till Thursday.