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COVID-19 effect on banks appears transitory; select sectors to get impacted, but only for the short term
Our interaction with managements of select banks and SMEs suggests that nearterm challenges persist in terms of lower domestic sales due to lockdown, imposition of section 144 (limited to select cities/towns as of now) and export closure. Further, urban/metro market is more vulnerable to demand slowdown than the rural market as per the participants with whom we interacted. Industries such as textile, tourism/hotel, chemical (where raw material supplies are from China) and retail are likely to get adversely affected by COVID-19 risk. However, the managements did highlight that it is too early to quantify the impact, though it is most likely transitory in nature and unlikely to materially disrupt cashflows for SMEs. Experiences during demonetisation, GST and floods suggest that smallticket, self-employed segment (SMEs) is resilient and well equipped to navigate short-term business disruptions. Further, the RBI has historically supported SMEs by allowing forbearance during challenging times and may do it again if needed.
* Sectors like textile, tourism/hotel, chemical and retail are more vulnerable in the current scenario, but the impact is most likely to be limited to metro/urban centres. Currently, mall closure and section 144 are largely implemented in metro/urban centres only. Our channel check suggests that rural/semi-urban centres have so far not witnessed any lockdown. However, in the coming days, if situation worsens from current level, the impact could be on a larger scale. Against this backdrop, we have analysed bank-wise and sector-wise exposures to the most vulnerable segments of the economy. As per our analysis, City Union Bank and Karur Vysya Bank appear to have higher exposures to these sectors. Within SFBs, AU SFB has <15% exposure (of outstanding Rajasthan portfolio) to tourism and <20% exposure (of its vehicle finance book) to taxi/tour operators.
* Loan growth implication. COVID-19 impact is currently limited to metro/urban centres as of now but, if the situation worsens, it could materially impact systemic credit growth. In a worst-case scenario, if mall closure and section 144 are imposed in more cities/towns, incremental disbursements for banks are likely to get impacted materially. Thus, banks having higher repayments over the next 3-6m and 6m-1yr buckets could witness higher impact on growth. We have looked at maturity profile of small banks from Dec’19 Basel III disclosures and it appears that KVB and SIB are more vulnerable to lower growth as ~22%/21% of their advances are due to mature over the next 3-6m and 6m-1yr. CUBK/DCB appear better placed with only 15%/11% of advances having maturity over next 3-6m and 6m-1yr.
* Asset quality implication. We believe the impact of GST on SMEs was more lasting, especially for players whose profitability was largely linked to tax-arbitrage. Impact of COVID-19 would be more transitory in nature, hence limited. We have looked at slippage trends at DCB/CUBK/KVB/SIB post GST implementation, i.e. from Q2FY18 onwards. We observe, post GST implementation, government/RBI extended a series of relaxation to support SMEs during the transition phase (RBI schemes to support SME A&B). However, in Q2FY20, the extended payment period lapsed and, since then, the pace of incremental stressed asset formation (including one-time restructured accounts) in the SME book accelerated (chart 2).
* Sensitivity analysis. We present sensitivity analysis if loan growth moderates by 5% and credit cost increases by 25bps. As per the analysis, 5% drop in loan growth in FY21E would drag down earnings by an average of 5% for our small bank coverage universe, while 25bps increase in credit cost would hit earnings by average of 16%. KVB and SIB appear more vulnerable to lower growth and higher credit costs. AU SFB, DCB and CUBK are better placed.
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