Morgan Stanley upgrades IndusInd Bank stock rating to Equalweight on recovery outlook

Morgan Stanley upgraded IndusInd Bank to Equalweight from Underweight, raising its price target to INR785.00, despite a significant 42% cut in FY26 EPS estimates driven by increased credit cost projections to 2.0% and accelerated provisioning. While near-term loan growth and fees are expected to moderate, the firm maintains a positive medium-term outlook, anticipating net interest margin recovery by Q2 FY26 and normalized credit costs post-FY26. This outlook projects improved return on assets to 1% by FY28, underpinned by a cleaner balance sheet and stronger coverage ratios.

Analysis

Morgan Stanley has upgraded IndusInd Bank Ltd (IIB) to Equalweight from Underweight, raising its price target to INR785 from INR750. This upgrade is notable as it coincides with a significant 42% cut in the firm's earnings per share (EPS) estimate for fiscal year 2026, driven by an upward revision of credit cost projections to 2.0% from 1.7% and the factoring in of accelerated provisioning. The near-term outlook for IIB is challenging, with expectations of moderating loan growth and fee income in FY26, which is projected to impact core pre-provision operating profit. However, the upgrade reflects a more constructive medium-term view. Morgan Stanley anticipates a recovery in net interest margins (NIMs) beginning in the second quarter of FY26, supported by a potential falling interest rate environment. The bank's balance sheet is expected to be cleaner with stronger coverage ratios by the end of FY26, setting the stage for a normalization of credit costs to 1.2-1.3% levels thereafter. This recovery is forecast to drive an acceleration in loan growth to 13% year-over-year in FY27, a sharp increase from the 3% anticipated in FY26, ultimately leading to a return on assets of 0.85% in FY27 and 1% in FY28.

Key Decisions for Investors

• The upgrade to Equalweight suggests Morgan Stanley believes the severe near-term headwinds, including the 42% FY26 EPS cut, are now largely reflected in the stock's valuation, warranting a hold for investors with a medium-term horizon.
• Investors should recognize that the investment case is predicated on a 'look-through' past a challenging FY26; the thesis will be invalidated if credit costs remain elevated or loan growth fails to re-accelerate in FY27.
• Key metrics to monitor for validation of the medium-term outlook include NIM recovery in Q2 FY26, stabilization of credit costs, and early signs of loan growth recovery towards the projected 13% in FY27.