Time to buy banks? Morgan Stanley says yes as banks are entering 2nd leg of earnings upgrades

• The theory of a post-Covid capex boom is gaining favour with analysts and financial institutions.
• This, according to Morgan Stanley, coupled with de-leveraged balance sheets and other factors is pushing Indian banks towards an earnings upgrade cycle.
• With NPAs at a 6-year low in March, 2022, and a resurgence in loan demand, Indian banks are all set to reap a bounty.

Indian banks are gearing up for the second leg of the re-rating cycle, according to analysts at Morgan Stanley. Citing factors like strong balance sheets and an improving trend in capacity utilization rates, the research firm has raised estimates for almost all banks in its coverage, except IDFC First Bank.

“Strong balance sheets, lessening macro concerns, and improving capacity utilization set the stage for a capex up-cycle in FY24-FY25, which we think could drive a second leg of rerating at Indian banks,” the Morgan Stanley report said.

Bank re-rating cycles work in two legs, and Morgan Stanley says Indian banks are in a transition phase between the two.

“The first leg is usually driven by expectations around better asset quality. The second, more sustained leg is usually driven by loan growth acceleration that sets an earnings upgrade cycle, and we believe catalysts for this are falling into place,” the report said.

Here are Morgan Stanley’s recommendations and target prices for Indian banks:


Source: Morgan Stanley, NSE | Upside compared to prices on September 7, 2022

Beating the Covid blues

Immediately after the Covid pandemic, the Reserve Bank of India came out with a loan moratorium scheme to help borrowers who were hit hard by the pandemic and were finding it difficult to make their loan repayments. This was extended during the second wave in 2021 as well.

Several reports have since estimated a rise in non-performing assets or NPAs. A Crisil estimate last year revealed bank NPAs could rise to 9%, and stressed assets could touch 11%.

However, RBI data revealed that bank NPAs instead fell to a 6-year low of 5.9% in March, 2022.

This has prompted research firms like Morgan Stanley to upgrade their earnings estimates for most Indian banks.

“Indian banks have emerged stronger from the COVID crisis. They have improved capital ratios and increased coverage, and have higher liquidity ratios. Moreover, trailing loan growth in riskier segments has been muted due to the pandemic,” the report added.

Retail loan demand is back

The report further added that the demand for loans from the retail, and small and medium enterprises segments is back. This, combined with the demand for loans from the corporate segment due to a fresh capex cycle, is being seen as a catalyst for improved capacity utilization.


A post-Covid capex boom is fast gaining favour with analysts across the spectrum, with RBI and HDFC Institutional Securities also bullish on it.

“Going forward, improved private corporate balance sheet, rising capacity utilisation level, robust demand sentiments, higher capital spending and various policy initiatives by the government are expected to revive the capex cycle,” said a report by the Reserve Bank of India.

“The analysis clearly highlights multiple engines of growth starting to fire together, which would lend stability and visibility to capital outlay in the economy over FY22-26,” said a report by HDFC Institutional Research.

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