Global investment advisory firm Morgan Stanley has said that Indian banks are set for re-rating, thanks to a slew of catalysts such as strong balance sheets, lessening macro concerns and improving capacity utilisation which set the stage for a capex upcycle in FY24-25.

Bank stock re-rating cycles work in two legs; Indian banks appear to be in a transition phase between the two, the global major said. “The first leg is usually driven by expectations around better asset quality. As tail risks recede, stocks improve sharply to normalised multiples – this has already occurred over the past two years. The second, more sustained leg, is usually driven by loan growth acceleration that sets an earnings upgrade cycle, and we believe catalysts for this are falling into place,” it added.

In a report, authored by Sumeet Kariwala and Subramanian Iyer (equity analysts), and Bhavik Shah and Meera Midha (Research Associates), Morgan Stanley said, “Our macro team sees a new leg of investment up-cycle led by improving trends in capacity utilisation rates, in addition to corporate sector profitability and de-leveraged banking sector balance sheets. This, in turn, could foster job creation, accelerate income growth, and drive more growth opportunities even in the retail/SME segment.”

“We scan for stocks that are not fully pricing in a growth upcycle, have access to retail deposits and high liquidity, and appear well equipped to accelerate market share gains as the macro outlook improves,” it said and added: “We believe ICICI Bank, Axis, Bank of Baroda, and SBI are well placed to capitalise on the upcoming growth cycle. We remain selective on mid-sized banks, with Federal and AU Bank our preferred picks.”

According to them, the key risks are: Weaker-than-expected external demand weighing on growth acceleration; slower-than-expected acceleration in deposit growth; and greater-than-expected competitive intensity.