Indian stocks: Morgan Stanley is bullish on major private banks in the attractive valuation compared to other banks.

Among the major private banks, ICICI Bank, Kotak Mahindra Bank, and Axis Bank remain Morgan Stanley's top picks, despite slight target downgrades.

In its recent note, Morgan Stanley released a series of latest information on Indian banks and suggested that investors shift to major private banks from state-owned banks and mid-sized private banks. The company emphasizes that it is a 'time for selection' as the franchise strength promotes the divergence of profitability.

The company downgraded Federal Bank from 'Equal-Weight' to 'Underweight' and lowered the target stock price from INR 200 per share to INR 185. Similarly, the target stock price for RBL Bank was lowered from INR 260 to INR 210 with a reaffirmation of the 'Underweight' rating.

Among the major private banks, ICICI Bank, Kotak Mahindra Bank, and Axis Bank remain Morgan Stanley's top picks. As for public sector banks, analysts are taking a cautious stance, with State Bank of India (SBI) and Bank of Baroda being maintained at 'Equal-Weight' with target stock prices of INR 800 and INR 265 per share, respectively.

Punjab National Bank (PNB) was also downgraded to 'Underweight' with a target price of INR 73 per share. Additionally, Bank of India and Canara Bank were downgraded to 'Underweight' with target prices of INR 110 and INR 83 per share, respectively.

Morgan Stanley believes that major private banks are in a favorable position to weather the current cycle and are likely to have high relative valuations. They see a significant trade-off between growth and profitability in state-owned banks, while mid-sized private banks face structurally tougher conditions due to increased competition.

As a result, they recommend shifting further from state-owned banks and mid-sized private banks and investing in major private banks.