Shares of small finance banks have slumped over the past year, with price corrections ranging from 24% to 45%.
“Deposit competition has hit small finance banks, with some banks offering interest rates of 7-8% on savings and term deposits.Most SFBs have no exposure to microfinance or personal loans. and asset quality has deteriorated in this sector over the past few quarters,” said analyst Deepak Jasani.
Large private banks now look relatively more attractive given that their stock prices haven’t moved much over the past year and a half, Jasani said. He said these banks offer scale, scale and good corporate governance, making them a safer trade than SFBs.
Brokerage firm Motilal Oswal Financial Services believes asset quality pressure is likely to continue for small finance banks.
The brokerage said AU Small Finance Bank’s net profit for the quarter ended December is expected to rise 30.2% year-on-year to Rs 4.88 billion due to its merger with Fincare SFB. Net interest income is expected to increase 53% year over year, but net interest margin is likely to decline slightly. However, high delinquency rates in the MFI and card sectors may lead to a slight deterioration in asset quality.
Equitas Small Finance Bank has posted a modest quarterly report with PAT expected to be down 60% year-on-year as provisioning costs remain elevated for both new slippages and MFI slippages in the previous period, in line with its provisioning policy. There is a possibility that it will happen. Securities firms estimate that growth will reach 20% year-on-year, but NIM could slow by 18 basis points quarter-on-quarter.
“For SFBs, net interest margins are under threat and asset quality is deteriorating at a faster pace than larger banks. “I think it’s going to happen,” Jasani said.
The Nifty Bank Index underperformed the broader Nifty index in 2024. With the exception of a few banks, most banks are trading close to their average valuations.
“We believe slower credit growth and pressure on margin and asset quality are likely to weigh on banks’ earnings in the near term. This is already reflected in share price performance. MFI Insecure stress, including We believe it will last for a quarter and then ease gradually. We prefer stocks that are better positioned to withstand near-term asset quality deterioration.” mentioned in the quarterly preview.
