Old private Southern banks like Federal, LVB set for better times

The South-based mid-sized private sector lenders are poised to see accelerated earnings growth going ahead as their asset quality ratios have peaked out and loan growth is likely to revive after remaining muted over the past couple of years, said a report today.

Also, the niche positioning in their respective home markets will help banks like Federal Bank, Lakshmi Vilas Bank (LVB), South Indian Bank, City Union Bank and Karur Vysya Bank to grow faster, said the report by ICICI Securities.

“We prefer banks with superior earnings growth, sustainable NIMs, stable asset quality, granular loan mix and adequate capital. We expect these five banks to witness a loan CAGR of 11-22 per cent and earnings CAGR of 12-25 per cent over the next two years,” it said.

The brokerage says these banks’ expertise in small-ticket loans to the self-employed segment and good relationship—based banking model will ensure higher-than-industry growth. And therefore maintains a buy/hold on all these four lenders with Federal City Union getting a buy call and the other two a hold call.

“Asset quality improvement for these banks will be aided with strategic shift to retail/SME lending, lack of participation in large consortium—based lending and relatively small stressed-asset portfolios (5/25, SDR, S4A, standard restructured book etc) will come in handy.”

While the report sees a potential upside of 18, 19 and 18 per cent respectively for Federal, City Union and Karur, it sees 1 per cent upside to SIB and 5 per cent gain for LVB.

The niche positioning in the respective home markers has ensured that despite intense competition, coupled with their unique relationship—based business model and expertise in SME/retail lending, these banks have consistently maintained or gained market share in home states and at system level, noted the report.

It also attributes the long-lasting relationship these banks with the households, traders, SMEs, corporate branches etc helping them mine repetitive business.

At the same time these banks are aggressively targeting other markets and the report specifically names the Kochi—based Federal Bank as a stand-out case in breaking the wall to grow outside home state. Today Federal Bank nets as much as 80 per cent of its business from outside Kerala.

Another key enabler is their superior asset quality.

Asset quality of regional banks is far superior to that of their PSBs, due to higher retail/SME loans,where delinquencies are low while small—ticket loans enable speedy recovery.

The report noted that between FY12 and FY15 when state-run banks were struggling on asset quality and growth fronts, regional banks were realigning their business models to participate aggressively in the next phase of growth.

During the consolidation phase, they have strategically sacrificed growth to revamp business models and in the process, shifted their focus towards lending to retail and SMEs, and strengthened credit monitoring systems, enhanced efforts to improve Casa franchise, and cost optimisation.

“These efforts have started yielding positive outcomes as reflected in an increase in market share in their respective home states as well as at system level,” it says.

It named Federal and Lakshmi Vilas in market share in systemic advances and started demonstrating higher growth outside their home states, while Karur Vysya, South Indian and City Union are still in implementation mode.

The report attributes these banks better asset quality to the better understanding of geographical, political, and cultural dynamics of their geographies which help them take corrective steps well in advances and thus prevent delinquencies.

Noting that the Southern markets traditionally have better credit culture, the report saud of the five states with over 100 per cent credit to deposit ratio, three of them are in the South——TN, Andhra and Telangana, while Kerala has the lowest at 60 per cent but offers better opportunity.

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