Global financial major Morgan Stanley has warned of a further downward revision in the earnings and ratings of banking majors and non-banking financial companies (NBFCs) as India?s financial sector is expected to go through a rough patch for the next 1-2 years. The foreign brokerage attributes this to the sluggish economic growth, liquidity tightening measures by the RBI as well as India?s structural economic problems. In a seperate report, rating agency S&P also warns that the banking sector is unlikely to recover in the next 18-24 months due to slack economic growth
According to a latest Morgan Stanley analysis, liquidity tightening measures will have a three-fold impact on banks and Indian corporates going forward. As a result, the US financial services major has cut price targets of Indian banks and NBFCs by 6-50%. HDFC Bank and HDFC remain the top picks for the brokerage, even as it prefers to stay away from Axis Bank, State Bank of India and Punjab National Bank. Interestingly, Morgan also reduced the combined weightage for HDFC and HDFC Bank in its model Asia portfolio to 10% from 25%.
In its report, Morgan warns that loan growth could drop to near 10% for the next two years as a sluggish economy, relatively high interest rates and a reluctance on the part of corporates to invest will drag down demand for credit. Credit growth has remained between 13% and 15% for the last couple of months. The RBI has projected 15% credit growth for the full year. At the same time, the brokerage fears that the proportion of impaired loans could rise from 9.2% currently 12% by FY15 under their base case scenario. In a more extreme bear case scenario, proportion of impaired loans could rise to 15%, says the brokerage.
In the immediate term, pressures from the weak currency and the RBI?s liquidity tightening measures are also likely to continue. Corporate lenders as well as wholesale funded banks will continue to struggle given the spike in funding cost, it said. Currency depreciation will hurt Indian corporates? external debt, which is already pegged at $225 billion and 50-60% of it remains unhedged, the report added.
?We are assuming a much sharper deterioration in these metrics ? NIMs, loan growth, fee income, lower bond gains (especially state-owned banks) and higher provisioning costs with asset quality ? in a bear case with disruptive interest rates and anemic growth,? stated Morgan Stanley.
Incidentally, the CNX Bank Nifty has already declined over 15% compared with a 5% drop in the benchmark Nifty index in the aftermath of RBI’s liquidity tightening measures. From the beginning of the current calendar year, the Bank Nifty has shed nearly 22% vis-a-vis the broader Nifty, which has lost less than 7% so far in 2013.
?Should we buy/sell now? There may be rallies but we would sell these (banking stocks). Macro is unwinding and we believe next 3-4 quarters will see sharp spikes in impairments (slowing growth and higher rates),? stated the Morgan Stanley report. As Morgan Stanley painted a bearish picture on India?s financial sector, it said that valuations were near decade lows and could provide huge cushion to price decline.
?State-owned banks trading close to decade lows on any measure of valuation ? P/E, P/B, and MC/deposits. Private banks, too, are trading at fairly attractive multiples. This would imply that if the macro improves, the stocks could have a big run. However, given the weaker macro, we would expect bank stocks to come off further,? stated the report.