Morgan Stanley expects private lenders and non-banking finance companies to continue to outperform their public sector counterparts at a time when the domestic economy is showing signs of recovery.
“We like private lenders, with top picks being Axis Bank, HDFC Bank, IndusInd Bank, Kotak and Yes. NBFCs will also likely gain share and show reasonably good growth in their segments. Our top pick in this space is SKS,” said Anil Agarwal of Morgan Stanley.
It maintained its “underweight” ratings on all state-run banks under coverage, saying bad loan problems will likely drag on and profitability will stay low.
The investment bank expects new non-performing loan formation to decline by nearly 40 per cent year-on-year in FY17, but warned that over 4 per cent of system loans may still turn bad this year.
State-run lenders will continue to struggle to control bad loan, which will impact their profitability, it said.
“Incentive to dispose of bad loans at state-owned enterprises banks is not high. The loan officers at these banks are wary of approving disposals with any meaningful loss. This puts them at risk if there is any future assessment by vigilance committees,” Morgan Stanley said.
In contrast, private corporate lenders are confident about the watch lists, the investment bank added.