Morgan Stanley expects financials to outperform in 2022, aided by a combination of rising short term interest rates, lower credit costs (interest rates very low for Deposits), and higher credit growth from corporates.
“We are in the midst of a big bull market, and financials have not done well. The RBI has stayed accommodative longer than the market expected. It has held on to its dovish position to facilitate higher growth, and as a consequence, financials have struggled to perform in the last equity rally. “Financials need higher short-term yields to make more money, and so, relative to other sectors, the market has expressed its view that financials are going to lag.” That, the investment banking company said, may change in 2022.
Morgan Stanley doubled its ‘overweight’ position on financials to 600 basis points at the expense of materials, which it downgraded to ‘underweight’. The research house, in the report titled ‘Back Up The Truck and Load Financials’, said it expects banks to enter an “earnings acceleration cycle”. Balance sheets and profitability are much better than they have been over the past decade. “Coverage ratios have improved sharply, interest rates have likely bottomed, and pre-provision operating profit growth is well placed to accelerate.
Morgan Stanley listed two key drivers—loan growth acceleration and higher margin—that will be led by a turn in the interest rate cycle for growth. The best-placed banks amid higher rates would be ones that have higher current account-savings account ratios, retail deposits and floating rate loans. Its preferred picks among banks are ICICI Bank Ltd., Axis Bank Ltd. and State Bank of India, having the maximum positive leverage to a higher rate cycle.
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