[T.S.R:17086] Banks-Cutting Earnings Estimates, Downgrading Price Targets (Morgan Stanley)

Morgan Stanley

India Banks: Cutting Earnings Estimates, Downgrading Price Targets

Oil prices is a spanner in the works: India is more vulnerable than regional peers to rising oil prices – given twin deficits (current and fiscal deficit) and an already high starting point for interest rates. We are not making sustained higher oil prices a base case as of now. However, if oil prices are sustained meaningfully above US$100/bbl, it will have negative implications for funding costs / margins and subsequently growth / asset quality could come under pressure. 

Adjusting estimates to reflect increased macro uncertainty:

Our macro team has taken down its GDP growth estimate for F12 from 8.2% to 7.7%. Reflecting this, we are adjusting our earnings/PTs to reflect lower loan growth and weaker margins. Till further clarity emerges on the macro outlook, we would favor more defensive names (on a relative basis) like HDFC Bank and SBI (given deposit franchises).

 

We remain structurally positive on Indian banks given our expectation of robust profitability over the medium term. In the past three months, these stocks have been under pressure owing to domestic macro headwinds and more recently owing to increasing oil prices. If these headwinds continue, stock performance could remain tepid.

 

In this note, we take a closer look at these headwinds and their implications.

 

Valuations have moved to average levels after the recent correction:

On our estimates, SOE banks are trading at 8.5x F12e P/E and private banks at 16.2x. These are broadly in line with the trailing five-year averages and the only times these stocks have traded lower have been during significant macro stress. The question: how bad will macro stress get?

 

Macro trends – liquidity & food inflation – seem to be improving at the margin…

Inter-bank liquidity deficit has improved from the bottom of US$32 bn to US$11 bn recently. It could improve further, given the increase in deposit rates. Food inflation pressures seem to be cooling, down to 10% YoY from the peak of 21%.
 

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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