Morgan Stanley Sees ‘Second Leg Of Rerating Cycle’; Lists Top Picks

Strong balance sheets, lessening macro concerns and improving capacity utilisation set the stage for a capex upcycle in FY24-FY25, which could drive a second leg of rerating at Indian banks, according to Morgan Stanley.

The research house, according to its Sept. 6 note, raised estimates and price targets for nearly all banks in its coverage, barring IDFC First Bank Ltd. Target prices were raised between 5% and 21%.

Bank stock rerating cycles work in two legs and Indian banks appear to be in a transition phase between the two, Morgan Stanley wrote.

“The first leg is usually driven by expectations around better asset quality. As tail risks recede, stocks improve sharply to normalised multiples—this has already occurred over the past two years,” it said. “The second, more sustained, leg is usually driven by loan growth acceleration that sets an earnings upgrade cycle, and catalysts for this are falling into place.”

“Our macro team sees a new leg of investment upcycle led by improving trends in capacity utilisation rates, in addition to corporate sector profitability and deleveraged banking sector balance sheets,” Morgan Stanley said.

According to the monthly data released by the Reserve Bank of India, bank credit in July rose at its fastest pace in three years, helped by retail loans and services credit.