As the economy hobbles back to normalcy and interest rates continue to remain low, private banks stand to gain the most in 2021, analysts said. The strengthening of capital buffers, build-up of excess provisions and improved liquidity positions could help large private banks gain market share and usher them into their “golden age”, maintained some analysts.
In a recent report, Morgan Stanley Research said large private banks had emerged stronger out of the Covid crisis in terms of their capital positions. Moreover, they have been big beneficiaries of increased digital adoption. “A combination of these factors will help them gain rapid market share and materially lower cost to income ratios over the next few years. We see 25-40% return upside at large private banks,” the report said, adding that large private banks are entering a golden age.
Banks have conservatively raised capital and built aggressive provisions and Morgan Stanley believes the current stock of provisions at large private banks is enough, and will help them normalise on credit costs in H1FY22. Mid-sized private banks have followed a similar path, but have relatively lower excess provisions. However, given their strong balance sheets, they will keep credit costs elevated in H2FY21 and normalise on credit costs by H2FY22, the report said.
Credit Suisse has maintained its ‘overweight’ stance on banks, both for the private pack and State Bank of India (SBI). Their performance is likely to be driven by earnings delivery. “Banks, especially private banks, remain the best vehicle to gain exposure to the general economic uplift that we anticipate,” the investment bank said in a recent report.
Also, the significant downgrades seen by banks in FY21 suggest that there is room for gain next year. With banks now comfortable with their corporate non-performing assets (NPAs), and growth outlook improving, Credit Suisse said risks of substantial cuts to FY23 earnings were low.
Morgan Stanley pointed out that another challenge for Indian private banks was that of funding, as they were gaining market share in loans faster than deposits. Consequently, loan to deposit ratios were high, and private banks were paying a premium on term deposits relative to state-owned banks. This premium has now shrunk. “…we note that large private banks have significantly accelerated pace of deposit market share gains over past two years, and hence reduced the premium that they pay on term deposits,” Morgan Stanley said.