Indian Banks have seen a sharp re-rating since June, especially the mid and small caps which have seen significant value correction from the lows of 2022. Correction in some banks is as high as 60% from their 2022 bottoms. Morgan Stanley has issued a report which suggests that there are 2 re-rating cycles that the Indian Banking system was to see.

The first leg is usually driven by expectations around better asset quality says Morgan Stanley. Morgan Stanley believes it has already happened over the last 2 years. Going forward, Morgan Stanley expects loan growth to accelerate and sustain as capex spending accelerates. The macro team at Morgan Stanley sees a new leg of investment up-cycle led by improving trends in capacity utilization rates. Further, they believe that corporate sector profitability and de-leveraged banking sector balance sheets will further aid the sector going forward.

In this regard, Morgan Stanley believes that access to retail deposits could be the key for delivering profitable revenue growth. Morgan Stanley expects the competitive intensity in retail deposits to grow going forward. They expect private banks to turn aggressive. Broadly, Morgan Stanley believes that larger banks – both private as well as state owned – will have a better competitive advantage and are better placed to accelerate loan growth and gain market share. On this front, Morgan Stanley believes that banks not fully priced, having retail deposits and high liquidity appear well equipped to accelerate market share gains as the macro-outlook improves.