The US-based multinational investment bank said the large banks, HDFC Bank, ICICI Bank, State Bank of India, and Axis Bank, have an edge over the mid-size banks given the higher interest rates and chaos in the non-banking financial companies (NBFC) space
New Delhi: Global financial services firm Morgan Stanley has said that the large private banks are close to growing bigger in stature and well positioned to dominate the space.
In its research report, the US-based multinational investment bank said the large banks, HDFC Bank, ICICI Bank, State Bank of India, and Axis Bank, have an edge over the mid-size banks given the higher interest rates and chaos in the non-banking financial companies (NBFC) space. It said the banks could give 30-40% return in the next 12 months.
It said the banks’ performance was good but given the liquidity advantage, it should fuel further acceleration in PPOP (pre-provision operating profit) growth.
According to financial terms, pre-provision operating profit (PPOP) is the amount of income a bank or similar type of financial institution earns in a given time period, before taking into account funds set aside to provide for future bad debts. The report also stated that factors like better retail funding bases and digitisation initiatives are the other key favourables for large banks.
Analysts pointed out that interest rates had been rising in India for some time, which drove their preference towards banks with strong liquidity.
“The IL&FS default and subsequent pressure on NBFCs are likely to make this shift quicker and starker. Funding costs for wholesale funded institutions are increasing – which will hamper margins and growth and potentially asset quality,” the report said.
Analysts added that large banks can accelerate loan growth and improve spreads for both assets and liabilities over the next three years.
The global financial services firm downgraded Yes Bank Ltd. and RBL Bank Ltd. to underweight from equal weight, and cut the rating on AU Small Finance Bank Ltd. to equal weight from overweight.
The firm also noted that state-owned banks have excess liquidity but are unable to lend given low capital. The banks can also benefit from the changing situation if growth capital is infused. The only large public sector bank it is overweight on is SBI.
(With agency inputs)
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