[T.S.R:16009] Morgan Stanley: Deposit Aggregators LIC Hsg, Yes Bk & IndusInd Will Win Big

Morgan Stanley India Financial Services   Asset Aggregators Heading For A Sweet Spot   Asset aggregators – NBFCs and small private sector banks with relatively higher wholesale funding – have performed broadly in line with the BSE Bankex on a YTD basis. Recently, they have marginally underperformed. Given their niche focus and relatively smaller size, we believe they offer higher growth potential than the banks.   The rising rate environment and their wholesale-funded nature have prompted fears of intensifying funding pressures, which has limited their outperformance. With expectations of QE2 increasing and capital flows to India strengthening, we believe that funding costs may be capped even as growth remains strong – hence, these entities could be heading for a sweet spot.   Volume growth outlook remains strong: The combination of robust economic growth, rising asset prices and high foreign capital inflows will continue to drive a strong volume growth outlook at these entities.   Funding cost pressures are present…but are unlikely to intensify: 3M commercial paper rates have moved up by 330 bps since the start of the calendar years. This has pressured margins at wholesale funded institutions.   We expect policy rates/funding costs to rise further, but the risk of a sharp rise has decreased materially owing to potential further monetary loosening by central banks in the developed world.   Benefiting from pricing power / lending discipline : The other factor supporting margin progression for these entities is pricing power in their focus areas, given strong demand and rational competition. Indeed, banks with strong liability franchises have also raised lending rates.   Preferred picks are LIC Housing Finance, IndusInd and Yes Bank : Our preferred picks on this theme are LICHF, IndusInd and Yes. We believe that HDFC and IDFC will also benefit – but remain EW given valuations. We have taken up our earnings and price targets for these stocks to reflect the improved margin outlook. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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