We hosted five small to mid-sized private banks, Equitas, South Indian, Karnataka, Karur Vysya and CSB Bank, at our ‘Millions Under Billion’ conference held during Feb 17-19 to understand their perspective on growth/asset quality in the near term and their long-term business plans. CSB witnessed decent investor interest, while SIB had a moderate interest but we believe could be a potential long-term turnaround story.
* Growth remains sub-par due to corporate de-bulking; focus shifting towards retailization of balance sheet:
Most small and mid-sized private banks (barring CSB and Equitas) have reported sub-par growth (<15-20%) in the past few quarters, given their focus on corporate de-bulking (consortium loans) after being hit by lumpy NPAs and their traditional key forte SMEs too reeling under prolonged stress. That said, focus of these banks, like their large peers, is also shifting to retailization of assets/liabilities. On the liability front, CASA ratios have improved across banks, benefiting from sector-wide SA accretion due to the flight to safety and shedding of bulk deposits. Kerala-based CSB has also expressed interest for an inorganic acquisition (PSB/PVB) to mainly strengthen its liability franchise and gain scale. Within retail assets, gold loan is re-emerging as a preferred product across banks, followed by affordable housing, due to the favorable risk-return profile. Most small to mid-sized banks (in our conference/Q3 results call) have guided for growth acceleration from H2FY22, led by retail/SME, once the stress recognition is behind. Among these banks, we believe that Equitas, Federal Bank and CSB are expected to clock better and quicker growth.
* Legacy corporate stress behind; ECLGS/restructuring to limit SME stress in near term:
Most banks said that legacy large corporate stress is largely behind, while signs of resolutions in some of these corporates are visible (namely DHFL, ILFS), which should benefit corporate-heavy banks like KVB/SIB to some extent. SMEs have been reeling under stress due to multiple shocks (including DeMo/GST), and Covid-19 has accentuated the pain. Bankers believe that the combination of ECLGS/RSA should limit NPA formation in SMEs for the near term, but they will need a sustained and strong economic revival to limit any tail-end risk. Our analysis suggests that restructuring rates for small- and mid-sized banks may be high in the range of 2-6% vs. large private peers (0.4-3%), with Federal being at the lower end and Ujjivan at the higher end.
* Building provisioning/capital buffers to improve shock absorption capacity in long run:
Most small and mid-sized banks have traditionally been operating with low specific PCR unlike large banks. However, some banks now plan to improve their specific PCR and build counter-cyclical provisioning buffers once the stress eases out. Among the small- and mid-sized banks, Federal, CSB, Equitas and Ujjivan carry high provisioning buffers (particularly post Covid-19), while SIB has the lowest. In our view, building provisioning buffers could keep the provisioning cost higher than the normal levels but should be long-term positive as it will reduce earnings volatility. Capital has been a major constraint; however, with improving market conditions some of the relatively weak (SIB) and strong banks (Federal) may line up to raise clean-up/growth capital.
* Outlook & Valuation:
Unlike large PSBs/PVBs, the overall asset quality performance of small and mid-sized PVBs (barring Federal) was relatively sub-par in Q3. Most banks (in our conference/Q3 results call) expect stress to remain elevated for the near term (though partly eased out by ECLGS/RSA) and growth to accelerate from H2FY22, led by retail/SME as stress recognition is behind. Within our coverage, we like Federal (Buy), CUBK (Buy), Equitas (Buy) in small and midsized banks, while have Sell rating on DCB and Ujjivan SFB. We like Federal for its relatively better asset quality, strong liability profile, expected healthy return ratios and reasonable valuations (0.9x FY23 ABV), though management change remains a key monitorable in the near term. We also like CUBK due to its pedigree management, strong CAR and expected normalization toward traditionally higher RoAs (1.6%) from H2FY22. Among non-coverage banks, CSB’s turnaround remains a workin-progress, while SIB under new MD could be a turnaround candidate in the long run.
To Read Complete Report & Disclaimer Click Here
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
Above views are of the author and not of the website kindly read disclaimer