FILE PHOTO: Commuters walk past a bank sign along a road in New Delhi, India November 25, 2015. REUTERS / Anindito Mukherjee / File Photo

BENGALURU (Reuters) – India’s public lenders are expected to see moderate bad debt additions, but banks’ structural problems could cap their stock returns, Morgan Stanley said Thursday.

Some of the country’s state-owned banks have long struggled with a pile of bad loans, prompting the government to inject more funds to consolidate their balance sheets.

“In recent years, SOE banks have seen a large injection of capital by the government, lower risk-weighted asset density, higher provisioning and large recoveries,” said the brokerage in a report, adding that slippages were moderate, fees In addition to bad debts, credit costs will also moderate over the next few years.

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 business recovery cycle.

In February, SBI said its asset quality had remained largely stable and the lender had revised its cost of credit forecast to less than 2% for the year. A return to pre-pandemic retail growth levels drove the bank’s third quarter profit well above estimates.

But weak underwriting practices, the shrinking loan market and the sector’s share of deposits will weigh on the shares of many other public sector banks, even if cheap valuations make them attractive, Morgan Stanley said.

“We believe that SOE banks will continue to lose loan market share due to technological changes, strong competition and a low internal rate of capital generation,” the house analysts said. brokerage.

The Nifty index of public sector banks was down 0.4% on Thursday. The index has risen nearly 39% so far this year compared to a decline of around 31% in 2020.

Reporting by Nallur Sethuraman in Bengaluru; additional reporting by Chris Thomas; Editing by Rashmi Aich