“With improvement in the rural economy, and now that demonetisation and GST pain is behind, small banks would focus more on acquisition of clients and cross-selling of products. This would help to increase their loan book, retail (from individuals) deposits and non-loan fee income,” says Manish Oswal, analyst at broking house Nirmal Bang.
Their loan book, for example, is expected to grow 25-38 per cent in FY19. A revival in the rural economy and improvement in semi-urban areas would provide an upward thrust here.
Importantly, the change in liability (deposit) mix will further propel earnings, at a time when other finance companies might get hit due to a rise in interest rates and high bond yields. After converting into banks, their low-cost deposits have increased sharply, reducing the share of costly sources of borrowings. At Ujjivan, for instance, the share of bank loans or debentures had reduced to 25 per cent by end-March, from 75 per cent a year before. Their average cost of borrowing came down from 10.5 per cent in FY17 to 9.4 per cent in the March 2018 quarter.
Beside, these banks are also aiming to grow their current and savings account ratio faster — these are the cheapest form of deposits. However, there is a flip side. “Access to low-cost retail deposits will help SFBs to boost their earnings. However, they have to control their cost to income ratio, likely to rise, owing to branch expansion or investment in banking infrastructure,” says Rajesh Gupta, assistant vice-president at SBICAP Securities.
Besides, while some believe diversification of the loan book to non-micro finance customers would be an advantage, others are not so excited, since micro-finance loans generate higher yield as compared to business loans. It would be interesting to see how the asset mix plays on the margins, if these banks choose to increase the share of non-micro loans.
The asset quality of these banks, after spiking in earlier quarters, is also improving. With more recoveries, due to a normal monsoon and improvement in cash flow of rural folk, this metric should look better in FY19.
With all these factors, many analysts are positive on the stocks of SFBs, expecting a 10-17 per cent rise. However, in select cases, their high valuation would restrict a sharp gain. AU Bank, for instance, is trading above seven times its FY19 book value. So, a fall in the share price could provide a better entry point to investors.