Mumbai: Higher rates and turmoil in the non-banking finance companies (NBFC) pack are set to improve large banks’ positioning, said Morgan Stanley adding that it preferred ICICI Bank Ltd., HDFC Bank Ltd., State Bank of India and Axis Bank Ltd.

“These banks were doing well, but the liquidity advantage should fuel further acceleration in PPoP (pre-provision operating profit growth)," Morgan Stanley analysts said in a note on Sunday.

Morgan Stanley analysts pointed out that interest rates had been rising in India for some time, which drove their preference towards banks with strong liquidity.

“The IL&FS default and subsequent pressure on NBFCs are likely to make this shift quicker and starker. Funding costs for wholesale funded institutions are increasing – which will hamper margins and growth and potentially asset quality," they added.

Morgan Stanley analysts expect large banks – HDFC Bank, ICICI Bank, SBI, and Axis Bank – to accelerate loan growth and improve spreads for both assets and liabilities over the next three years.

“The large corporate lenders showed a decline in the PPoP market share to 29% (from 32% five years ago). Given this backdrop and increased focus on retail, we expect their PPoP market share to rebound to 32% over the next three years," they added.

Additionally, they downgraded Yes Bank Ltd. and RBL Bank Ltd. to underweight from equal weight, and cut the rating on AU Small Finance Bank Ltd. to equal weight from overweight.

In reaction, Yes Bank shares and RBL Bank shares dropped 3.08% and 7.01%, respectively, on Monday, while AU Small Finance Bank dropped 2.98%.

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