Morgan Stanley has issued a report advising investors to become more selective in their banking sector investments. The firm has downgraded Federal Bank to ‘Underweight’ (UW) from ‘Equal-weight’ (EW), with a reduced target price (TP) of ₹185, down from ₹200. RBL Bank remains rated ‘Underweight,’ with its target price also lowered to ₹210 from ₹260.
Meanwhile, Morgan Stanley continues to favor large private banks, reiterating ICICI Bank, Kotak Mahindra Bank, and Axis Bank as key picks, though their target prices have been cut marginally. The report suggests that margins and asset quality in the banking sector are set to normalize over the next few years, leading to a divergence in profitability based on the strength of each bank’s franchise.
According to the brokerage, large private banks are expected to perform better and command higher relative valuations. However, some mid-sized private and state-owned enterprises (SoEs) could see profitability dip below cycle averages before the non-performing loan (NPL) cycle turns.
