Brokerage firm Morgan Stanley expects India's banks to have a strong financial year 2024, given the loan growth and benign credit cycle. It also expects better operating leverage and better Net Interest Margin for the lenders.

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However, the extent of the upside is subject to the pace of recovery each bank will have in its deposit growth. Morgan Stanley expects banks with more retail deposits to generate higher revenue and profit as well.

Based on this, the brokerage has highlighted six key themes for the upcoming year that will dominate the sector. Take a look:

Expect loan growth to sustain as capex accelerates

Expect deposit growth to improve on higher rates

Net Interest Margin (NIMs) may rise till the March quarter of the current financial year and then moderate

Deposit growth, better operating leverage will aid revenue growth and profit

Credit cost is likely to undershoot over the next few years

The other small and mid-sized banks that have not participated in the rally may catch-up

Among the biggest beneficiaries would be banks with access to retail deposits as they would be able to generate higher/profitable revenue growth in the current cycle. In terms of specific names, Morgan Stanley says that private lenders like ICICI Bank and Axis Bank will gain strong traction as the second leg of re-rating plays out for Indian banks.

Among state-owned banks, the investment bank believes Bank of India and Bank of Baroda have the best relative risk reward. Notably, Morgan Stanley is overweight on both BoB and BoI with target prices of Rs 220 (raised from Rs 195 earlier) and Rs 125 (raised from Rs 95), respectively.

Yet, highlighting the risks, Morgan Stanley says that a weaker-than-expected external demand, or a slower-than-expected deposit growth, or higher-than-expected competitive intensity among banks can weigh on the positive sentiment around the banking sector.

Also Read: Morgan Stanley expects further re-rating of India's state-run banks; cites two top picks