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‘Reduction in loans of PSU banks’

Morgan Stanley said on Thursday that Indian state-owned lenders expected to see additional additions to bad loans, but banks’ structural issues could result in returns on their shares.

Some of the country’s public banks have long struggled with a pile of bad debts, prompting the government to pump its balance sheet into more funds.

“Over the few years, state-owned venture banks have seen significant capital infusion by the government, density of risk-weighted assets, higher provisions and some major recoveries,” the brokerage said in a report. In the next few years, fresh additions to bad debts, credit costs will also be moderate. The brokerage preferred India’s largest lender State Bank of India as well as large private banks, expecting them to play a major role in the corporate cycle.

In February, SBI said its asset quality was largely stable and the lender reduced its credit cost guidance to less than 2% for the fiscal year. The return to pre-epidemic levels of retail growth far outstripped the bank’s third-quarter profit from previous estimates.

Morgan Stanley said the weak underwriting practice, the sector’s declining loan market and deposit shares would also decrease on stocks of many other public sector banks, as they find attractive valuations attractive.

Brokerage analysts said, “We think state-owned enterprise banks will continue to lose market share of debt, technology changes, strong competition, and a weak internal rate of capital formation.”

The Nifty public sector bank index was down 0.4% on Thursday.

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