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    Morgan Stanley prefers these 4 bank stocks ahead of Q3 earnings

    Synopsis

    These include reduction in excess liquidity, higher value for CASA deposits, and shift towards relatively higher-margin loans and lower slippages driving lower interest income reversals,” Morgan Stanley said.

    Morgan Stanley prefers these 4 bank stocks ahead of Q3 earningsReuters
    Given a strong retail liability franchise, a higher share of floating/repo-linked loans and excess liquidity, the global brokerage firm Morgan Stanley's preferred stocks are Axis bank, ICICI Bank, Bank of India and Federal Bank ahead of Q3 earnings.

    "These banks are well positioned to improve margins as the rate cycle turns sand to capture growth. Overall, we expect banks to sound reasonably optimistic on revenue growth, with limited concerns about asset quality. This should continue to drive re-rating," Morgan Stanley said.

    The brokerage expects another quarter of higher margins and lower credit costs for Indian banks. It further stated that system loan growth is also holding up well at ~17% YoY (as of mid-December 2022) and initial updates by select private banks imply improved traction in term deposit growth following higher rates. It expects a combination of these factors to drive further improvement in RoAs.

    “We acknowledge that part of the current margin expansion cycle stems from the faster repricing of loans. That said, other factors too are driving margin expansion and should be sustained. These include reduction in excess liquidity, higher value for CASA deposits, and shift towards relatively higher-margin loans and lower slippages driving lower interest income reversals,” Morgan Stanley said.

    Morgan Stanley's preferred bank stocks:

    ICICI Bank

    ICICI Bank has been consistently outperforming its large private peers on PPoP growth. Investor focus will be on whether ICICI Bank is able to hold on to a ~20% YoY core PPoP growth run-rate, even as macro conditions get tougher, the brokerage said.

    “On asset quality, we expect bad loan formation to remain stable at Rs 45 billion (2.2% of trailing loans, annualized) vs Rs 43.7 billion last quarter. Credit cost will remain benign at 78 bps vs 72 bps last quarter. We expect PAT growth at 28% YoY vs 37% YoY last quarter,” the brokerage firm said.

    Axis Bank
    "We expect loan growth to remain healthy at 16% YoY vs 18% YoY last quarter. Sequentially, we expect loan growth of 5.5% vs 4.2% last quarter. Growth will be driven by high RAROC business, which includes SMEs and certain retail segments," Morgan Stanley said.

    "Asset quality performance has been in line with/better than expected in recent quarters, and we expect this to continue. We expect slippages to remain broadly steady at Rs 35 billion (2.1% of trailing loans, annualized) vs Rs 33.8 billion (2.2%) last quarter, and credit cost should be 45 bps vs 31 bps last quarter," it added.

    Bank of India
    "On asset quality, we expect slippages of Rs 15 billion (1.5% of loans, annualized) vs Rs 12.9 billion (2.6%) last quarter. We expect credit cost to moderate to 117 bps vs 161 bps last quarter. Overall, we expect a PAT of Rs 14 billion vs Rs 9.6 billion last quarter," the brokerage said.

    Federal Bank
    The bank has already disclosed its balance sheet metrics – gross loan growth was strong sequentially at 4.3%; this follows healthy sequential growth in 2QF23 at 6.2%.

    On a YoY basis, growth remains strong at 19.1% vs 19.4% YoY last quarter. Deposit growth accelerated to 14.8% YoY vs 10% YoY last quarter and was higher than system deposit growth (+9.4% YoY as of mid-December 2022). Sequentially, deposit growth was strong at +6.5%.

    (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

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