A Morgan Stanley fund is betting some private-sector lenders in India will emerge from the coronavirus pandemic stronger than others.

Kristian Heugh, co-manager of the $4.3 billion Asia Opportunity fund, expects private banks with strong deposit franchise and quality underwriting standards will gain market share from both state-owned lenders and the weaker private ones.

“The events of this year are likely to accelerate both these factors strong banks will gain share at a faster pace and the pace of digital adoption has picked up sharply,” Heugh said in an interview. His Asia excluding Japan-focussed equity fund was up 37 per cent this year through August.

Financials have been the worst-performing sector in Indian stock market this year, slumping more than 30 per cent. Soured loans are expected to swell to the highest level in more than two decades in 2021 following the worlds strictest lockdown measures. One silver lining is shutdowns are forcing Indians to access banking online, a habit that could see banks cut physical branches and save costs.

HDFC Bank

That’s why Heugh is looking past the short-term uncertainty to bet on private lenders like HDFC Bank Ltd., the best-performing financial stock in the S&P BSE Bankex index this year even after a more than 18 per cent fall.

The bank was among the funds top ten holdings as of end-August, accounting for 5.3 per cent of its portfolio. The lender currently faces regulatory scrutiny in the US. And its chief executive officer is set to step down after 26 years.

The bank’s lower cost base, coupled with industry-leading digital capabilities, can enable it to continue taking loan and deposit market share from weak public sector banks, Heugh said, adding that HDFC has strong risk management processes.

As of last month, ICICI Bank Ltd. was another Indian bank in the portfolio. Shares of the lender are down 35 per cent this year.

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