Small finance banks are now experiencing the benefits of having a banking license, allowing them to accept deposits. This has led to stable liabilities and lower cost of funds for these small finance banks (SFB), according to HSBC, opening up a Rs 7 lakh crore market opportunity. “SFBs face a Rs 7 lakh crore lending opportunity through expansion in products and penetration, as their funding costs decline,” analysts said in a report. The brokerage firm has maintained a buy rating on Equitas Holdings and Ujjivan Financial Services, with target prices that see strong upside potential.
What’s pushing SFBs?
Most SFBs have successfully transformed their liability mix since their conversion into a bank, HSBC said. Deposits, as a percentage of liabilities, now stands at 83% for Equitas, 89% for Ujjivan, and 90% for AU Small Finance Bank. “The sharp drop in the cost of funds has resulted in them having an edge over larger NBFCs,” HSBC said. The brokerage firm highlighted that since FY2016 SFBs such as Ujjivan, Suryoday, Equitas, and AU Small Finance have reduced their cost of funds by 680 to 458 basis points.
Massive market opportunity ahead
HSBC said that over FY16-3QFY22, the funding cost of SFBs is lower than that of one bank and twenty-four HFCs/NBFCs. “By segment, the current TAM translates to a Rs 1.7 lakh crore opportunity in home loans/affordable housing, Rs 3.2 lakh crore in vehicle loans, and Rs 1 lakh crore in SME/MSME loans,” they added.
As the winds turn for SFBs, analysts are expecting improvement in core profitability. RoA is estimated to be better as operating efficiency improves and credit costs moderate. Meanwhile, margins could also improve owing to a number of reasons including the waning impact of interest reversals as slippages moderate. Fee income is also estimated to rise as disbursements increase and more liability customers are acquired.
Equitas Holdings: Buy
Target price: Rs 167 per share
Analysts at HSBC estimate Equitas to deliver 72% EPS CAGR over FY22-24e led by 26% loan CAGR, improvement in NIMs/fee intensity and reduction in cost ratios. Equitas’ Tier 1 has strengthened after raising capital, this is expected to support the bank’s growth. Some downside risks involve; lower than expected loan growth, inability to attract deposits, and high credit costs. Currently, the stock is trading at Rs 101 per share, translating to an upside of 65%.
Ujjivan Financial Services: Buy
Target price: Rs 150 per share
Ujjivan is seen to be on a path of recovery after having reported losses for two consecutive years. “On the back of normalisation of credit costs and improvement in operating cost ratios, RoAs will likely expand to 1.5% by FY24e for the bank,” HSBC said. Ujjivan Financial Services stock trades at Rs 114 per share, hinting at an upside of 31%.