These 5 bank stocks are Morgan Stanley’s top picks in the sector

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Indian banks saw a strong rebound in January 2022, when they outperformed the Sensex and reversed the full underperformance of C2021. However, over the past two months, they have been struggling once again amid the uncertain earnings outlook driven by higher commodity prices and geo-political developments, highlighted global brokerage Morgan Stanley.

It expects the macro uncertainty to weigh on revenue growth acceleration in the near term, with limited impact on asset quality of Indian banks. In its order of preference, Morgan Stanley has moved up select mid-sized banks, with asset quality as a key catalyst. 

The brokerage’s top stock picks include ICICI Bank with target price of 980 in large banks and Bank of Baroda (BoB) with target price of 140 in mid-sized banks. Federal Bank (TP: 130), Axis Bank (TP: 910) and HDFC Bank (TP: 1,800) are also part of its top bank stock recommendations.

Morgan Stanley said it scans for bank stocks that are not pricing in asset quality normalization and can deliver strong PPoP growth despite the above macro backdrop. Mid-sized banks have had greater challenges on growth amid covid-related disruptions and should see better trends in future as COVID challenges normalize, it added. 

“We prefer large banks structurally, but push certain mid-sized banks up the pecking order given a better risk reward near term,” the note stated. Though, weaker than expected growth and/or sharp disruptive rise in interest rates by the RBI, that could increase the risk to asset quality, growth and margins and could act as key risks, as per the brokerage.

Morgan Stanley expects limited asset quality impact given strong corporate balance sheets, unlike in the past, as well as strong NPL coverage at Indian banks. 

This coupled with weak trailing loan growth in riskier segments will keep NPL formation in check. Indeed, the brokerage continues to build in normalized credit costs for India banks over the next two years.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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