Having established their business over several decades in Tamil Nadu (CUB, LVB and KVB) and Kerala (Federal and South Indian Bank), these have secured a strong customer relationship. An analysis by Antique Stock Broking indicates private banks, including older generation ones, are continually raising their market share in these two states, at the cost of public sector banks
(PSBs). “During FY12-15, when state-run banks
were struggling with deteriorating asset quality and growth, regional banks were building a strong business model to participate aggressively in the next phase of growth,” the report highlights.
In fact, these older generation ones had strategically let go of some growth during this consolidation phase, helping them to revamp their operations, now skewed to individuals and small & medium enterprises (SMEs). Federal Bank with 11 per cent market share is rated second in Kerala on the lending business; CUB, KVB and LVB have sustained their market share at over two per cent to four per cent, despite the intense competition from much larger private peers like HDFC Bank and Axis Bank.
The key reason for their success is ability to constantly serve the SME population. SME lending has always been the core focus of these banks -- the business is rewarding in terms of profitability and low credit costs, if backed by strong underwriting. Also, with the regional banks being able to customise their loans to suit customer requirement, these remain the first go-to source for SMEs. The average size for such SME loans is Rs 10-30 lakh, much lower than that of larger private banks (Rs 50-90 lakh).
SME loans remain a relatively unexplored segment for PSBs in these regions. Antique Stock Broking, after detailed interactions with SMEs in Tamil Nadu and Kerala, says the latter prefer regional banks over other financiers, including non-banking finance
companies and micro finance
institutions. For, the regional banks offer personalised service and allow access to the bank management. Interestingly, it also mentions that the turnaround time with regional banks is shorter compared to the larger peers.
The past three to four years have also been periods of clean-up at these banks. However, as most of the stressed assets pertain to the iron & steel and infrastructure sectors, lent to predominantly in FY10-11, the trend of high non-performing assets (NPAs) was seen even in FY17.
This should start moderating from FY18, as regional banks have reoriented and strengthened their lending practices. Loan sourcing, monitoring, recovering and underwriting processes have been segregated into separate functions, ensuring operational independence and closer watch on asset movement. This is much in line with standard practices at HDFC Bank, Axis Bank and ICICI. Analysts believe the gross NPA ratios should settle below two per cent in FY18, though CUB and KVB could remain exceptions for a few more years. However, the latter two also enjoy the highest return profile, partly compensating for the NPA issues.
That said, a slower than expected economic recovery could also be a drag on these lenders, as SME businesses are highly dependent on a strong operating climate.
What is comforting for investors is that despite a sharp 30-60 per cent stock price appreciation for SIB, Federal Bank, LVB and KVB, their valuations are still at only one to two times the FY18 price to book value estimate. CUB is the only outlier, trading over 2.5 times the FY18 book value.