However, with the economy rebounding at a faster clip than anybody’s expectation since the reopening in June, it soon became evident that the damage to household and corporates’ ability to repay their loans may not have been as severe as was feared in April.
If the easing asset quality issue made investors optimistic of a turnaround back in November, the Union Budget has helped cement that optimism. With the finance minister opting to create a bad bank-like structure and providing a stimulus that augurs well for credit growth, analysts believe that the country’s largest private sector banks are in the best place they ever have been.
Brokerage firm Morgan Stanley believes the country’s largest private sector banks are entering a “golden age”.
“Large private banks have emerged stronger post-crisis – balance sheets are strongest ever, and market share is accelerating. Expect RoAs (return on assets) to cross previous peaks, which will drive multiples much above their long-term averages,” the brokerage said in a note.
For perspective, Morgan Stanley said that in the last growth upcycle of 2003-07 in the banking industry, the returns of large private sector banks were anywhere between 300 per cent and 500 per cent.
Brokerage BofA Securities also noted that things have turned for the country’s largest private sector banks as their capital positions “have never been better” and their signs of growth improving.
“Valuations for the majority of banks remain attractive in the historical context, especially if we factor in better capital levels and lower COE. With asset quality risks not playing out, we see scope for valuation multiples to re-rate at least close to historical averages (base case) and even further if growth surprises positively,” BofA Securities said in a recent note.
That said, these banks will thrive in this “golden age”, according to Morgan Stanley:
HDFC Bank
Morgan Stanley has retained its “overweight” rating and raised its price target on the stock by 13 per cent to Rs 2,000, implying gains of 28 per cent from current levels. The brokerage firm said that the price target change is driven higher sustainable return on equity of the bank. However, in its most bullish case for the bank, Morgan Stanley sees the stock at Rs. 2,450, a gain of 56 per cent.
ICICI Bank
Morgan Stanley maintained its overweight rating and raised its price target by 13 per cent to Rs. 850, implying gains of 37 per cent over the next 12 months. Brokerage said that its change in price target is driven by change in return on equity and growth assumptions. In its most bullish case, Morgan Stanley sees ICICI Bank at Rs. 1,275.
Axis Bank
The brokerage firm also retained “overweight” on Axis Bank but raised price target by a sharp 28 per cent to Rs. 1,000, which implies gains of 37 per cent from current level. Morgan Stanley said it has removed its previous bear-case weight of 10 per cent in its valuation calculation given reduced risks from COVID-19. In its bullish case for the bank, the brokerage has set a price target of 1,695, more than double of current stock price.
IndusInd Bank
Similar to Axis Bank, Morgan Stanley said it has removed the 10 per cent bear-case weight in its valuation calculation for the bank resulting in a 5 per cent increase in price target to Rs. 1,225, which implies gains of 16 per cent. The brokerage’s bull case for the stock may result in gains of 93 per cent. Morgan Stanley retained its “overweight” call on the scrip.
