Morgan Stanley said it prefers banks with strong retail liability franchise, higher share of floating or repo-linked loans and excess liquidity. Such banks, the foreign brokerage in its Q3 earnings preview note said, are well positioned to improve margins as the rate cycle turns and to capture growth. The brokerage, which is hoping banks to sound reasonably optimistic on revenue growth in the December quarter, with limited concerns about asset quality, has a liking for Axis Bank, ICICI Bank, Bank of India and Federal Bank.
Axis Bank
Morgan Stanley expects Axis Bank’s loan growth to remain healthy at 16 per cent YoY against 18 per cent YoY last quarter. Sequentially, it expects loan growth of 5.5 per cent against 4.2 per cent last quarter.
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“Growth will be driven by high RAROC business, which includes SME and certain retail segments. We expect margins to improve 15 bps QoQ, to 4.11 per cent from 3.96 per cent last quarter. This will be driven by repricing of loan book, loan mix shift towards higher-margin business, and execution on retail liabilities. However, there will be offsets to margin expansion led by rising funding costs,” it said.
The brokerage expects Axis Bank to report a fee income growth of 18 per cent YoY against 20 per cent YoY last quarter.
“We expect cost growth to remain broadly steady at 14 per cent YoY against last quarter Consequently, core PPoP growth should remain strong at 40 per cent YoY against 43 per cent YoY last quarter. 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 3,500 crore (2.1 per cent of trailing loans, annualised) against Rs 3,380 crore (2.2 per cent) last quarter, and credit cost should be 45bps,against 31 bps last quarter,” it said.
PPoP stands for pre-provision operating profit.
Bank of India (BOI)
Morgan Stanley expects Bank of India’s loan growth to remain strong at 18 per cent YoY against 21.5 per cent YoY last quarter. Sequentially, loan book should grow 3 per cent against 4 per cent last quarter, the foreign brokerage said.
Morgan Stanley expects margins to improve 20 bps QoQ, to 3.25 per cent against 3.04 per cent last quarter. It has built in strong margin expansion for BOI saying the bank holds significant excess liquidity (LCR at 167 per cent) and, therefore, the bank benefits the most from loan book repricing with limited offset from rising cost of funds.
“We expect NII of Rs 5,540 crore ( up 9 per cent QoQ )against Rs50.8bn last quarter. We expect cost growth at 9 per cent YoY against 5 per cent YoY last quarter. This is partly led by higher staff costs, 13 per cent YoY (up 7 per cent QoQ) as we build in provision for the upcoming wage hike cycle from November 2022 onwards (i.e., for two months). Consequently, we expect core PPoP of Rs 2,440 crore (7 per cent QoQ) against Rs 2,290 crore last quarter,” Morgan Stanley said.
On asset quality, it expects slippages of Rs 1,500 crore (1.5 per cent of loans, annualised), against Rs 1290 crore (2.6 per cent) last quarter. Overall, it expects PAT for BOI at Rs 1,400 crore against Rs 960 crore last quarter. Key monitorables would include an update on appointment of new MD & CEO. The tenure of the incumbent MD & CEO Atanu Kumar Das ends in January.
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Federal Bank
Federal Bank has already disclosed its balance sheet metrics. Gross loan growth was strong sequentially at 4.3 per cent; this follows healthy sequential growth in 2QF23 at 6.2 per cent, Morgan Stanley said.
“On a YoY basis, growth remains strong at 19.1 per cent against 19.4 per cent YoY last quarter. Deposit growth accelerated to 14.8 per cent YoY against 10 per cent YoY last quarter and was higher than system deposit growth (up 9.4 per cent YoY as of mid-December 2022),” Morgan Stanley said.
Within overall deposits, customer deposits growth accelerated to 12.8 per cent YoY against 8.5 per cent YoY last quarter and was up 5.1 per cent sequentially.
“We expect margin to improve 10 bps QoQ to 3.41 per cent. This will be driven by repricing of loans and mix shifts towards higher-yielding assets, which will be partly offset by rising funding costs. NII growth should improve to 22 per cent YoY against 19 per cent YoY last quarter. Fee income should remain healthy at Rs4.7bn (up 30 per cent YoY)against Rs4.5bn last quarter,” it said.
Morgan Stanley expects costs to grow 12 per cent YoY against 9 per cent YoY last quarter. Consequently, it expects core PPoP growth of 41 per cent YoY, steady against last quarter. Morgan Stanley said it expects normalised asset quality trends with slippages of Rs 400 crore (1.1 per cent of trailing loans, annualised), against Rs 390 crore last quarter.
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 per cent YoY core PPoP growth run-rate, even as macro conditions get tougher, Morgan Stanley said.
The fo reign brokerage expects loan growth to remain strong at 21 per cent YoY against 23 per cent last quarter. Sequentially, it expects loan growth at 4.8 per cent, stable against last quarter.
“We expect margins to improve 20 bps QoQ to 4.48 per cent against 4.31 per cent last quarter. This will be driven by repricing of floating-rate loans and continued loan mix shift towards the retail and SME segments, while part of it will be offset by rising cost of funds. NII growth should improve to 32 per cent YoY (up 4 per cent QoQ) against 26 per cent YoY last quarter,” it said.
Morgan Stanley sees ICICI Bank’s fee income at Rs 4,670 crore (up 9 per cent YoY) against Rs 4,480 crore last quarter.
“We estimate cost growth to remain elevated, up 27 per cent YoY against 24 per cent YoY last quarter. Consequently, we expect strong core PPoP growth to continue at 25 per cent YoY against 24 per cent YoY last quarter. On asset quality, we expect bad loan formation to remain stable at Rs 4,500 crore (2.2 per cent of trailing loans, annualised) against Rs 4,370 crore last quarter. Overall, we expect PAT growth at 28 per cent YoY against 37 per cent YoY last quarter,” it said.
