A recent note published by Moody’s highlighted that pockets of stress continue in the SME segment and hence investors may have to brace for more pain. That said, bankers say the pain may not be as impactful as seen in the previous cycle. “We started turning cautious on SME loans a few quarters ago, and hence we don’t expect elevated stress in these loans,” said a banker.
Most mid-sized banks are also streamlining their businesses to offset any slowdown in the SME business. Federal Bank, for instance, saw its retail portfolio growing 25 per cent in the September quarter (Q2), led by home and gold loans. It is also building its unsecured and commercial vehicle loans businesses. While analysts at Jefferies have trimmed their FY20 earnings estimates by 2-2.5 per cent, they remain optimistic on Federal Bank’s loan growth and net interest margin, which they peg at 20 per cent and 3.2 per cent, respectively.
has guided for Rs 1,800 crore of stressed assets. It, however, remains committed to growth anticipated from credit cards and microfinance loans. Reckoned as a high growth–high margin yielding bank, analysts at Emkay Global remain positive on the stock. While they have reduced their earnings estimates by 13 per cent for FY20 and FY21, the analysts are confident that the bank’s return profile will normalise by the June quarter of FY21.
CUB, which has been an outlier among mid-sized banks on the bourses, presents a slightly different picture. With a 33 per cent exposure to SME loans, growth is slowing down, with Q2’s loan growth at 12 per cent year-on-year as against 14 per cent in Q1. Analysts at Emkay Global have cut their FY20 earnings expectations by 1.2 per cent, but feel that CUB’s capital position and earnings profile makes it better placed to absorb shocks. For investors, though, considering the gains registered by the stock, they could book some profit on the counter. Those wanting to take fresh exposure to stock can wait for better entry points.
While Federal Bank, CUB, and RBL Bank
seem better placed to handle the potential SME woes, trouble for KVB and DCB Bank could be more exacting, particularly on the growth front.
DCB Bank has the history of growing its balance sheet by 22 per cent on an annualised basis in the last 10 years, which could fall to 17–18 per cent in the next two-three years. JM Financial has downgraded its estimates for the bank by 8 per cent in FY20. While analysts don’t expect a further worsening in asset quality, a prolonged phase of slowdown may change the picture.
Among the lot, KVB appears most susceptible to shocks on asset quality and growth. At over 8 per cent gross NPA ratio, its asset quality is the weakest. The bank is rebalancing its loan book in favour of retail. This explains why despite retail loans growing 33 per cent year-on-year in Q2, the overall loan book grew just 1 per cent. This trend may continue for most of FY20, and hence, a meaningful recovery in its financials may be pushed to FY22. Investors may be better off staying away.