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Early Q3: Small Banks Report Good Quarter Despite De-Monetization


The effect of demonetization on cash collections of small banks was expected to be bad. But the results show some resilience by smaller banks so far.
The results of four small banks are out. DCB, Federal, Lakshmi Vilas, South Indian Bank and RBL have reported good profits despite the Demonetization bomb. The interesting part is, except Lakshmi Vilas Bank, all others were able to show at least some credit growth, when the whole industry was facing a de-growth. But we believe most of this growth came in before demonetization.
Demonetization has helped increase bank deposits, which in turn has triggered a lending rate war between the banks. SBI took the lead and has cut 90 basis points on its MCLR (lowest lending rate). This has resulted in cutting of lending rates by most banks. Given this, coming quarters, the profits will be more of volume driven rather than by margins.

What Makes Small Banks Attractive?

Small banks like DCB, RBL, Federal etc have shown strong results. These banks have lower NPAs, higher provision coverage ratios, have shown growth in advances and more importantly have shown sustained growth in profits. The advantage of these banks is their size. Small size gives them higher adaptability in adverse conditions and they currently operate in specific regions. Lets have a look on individual results of these banks.
Read the complete report on Banking Sector for Q1FY17 here.

DCB Bank:

  • DCB has reported revenue and profit growth of 28.77% and 24.51% YoY respectively.
  • Has reduced  its Gross NPA by 10.76% (in absolute terms) QoQ. The overall Gross NPA currently stands at 1.55%
  • Has got a credit growth of 24.27% YoY. And 1.03% QoQ.
  • Net Interest Margin at 3.95% is comparatively high with industry averages (2% – 2.6%).
  • Provision coverage ratio has increased to 75.64% from its previous quarter of 75.40% (RBI suggests at least 70%)

Early Q3: Small Banks Report Good Quarter Despite De-Monetization

Federal Bank:

  • Revenue and profit growth of 33.71% and 26.38% respectively.
  • Gross NPA increased by 7.24% (on absolute numbers) QoQ. But Gross NPA % remained at 2.78% levels.
  • Credit growth of 31.57% YoY and 7.64% QoQ.
  • Net interest margin above industry averages at 3.32%.
  • CAR has dropped from 12.85% last quarter 12.28%. Though still well above RBI stipulated 9.6%
  • PCR at 71.01% slipped from earlier levels of 72%. But still above RBI prescribed 70%.

Early Q3: Small Banks Report Good Quarter Despite De-Monetization

Lakshmi Vilas Bank:

  • The bank has shown a great growth in the last year and has reported revenue and profit growth of 21.60% and 69.57% respectively.
  • However, they provisioned lesser in the quarter, which would have boosted their profits even though NPAs increased.
  • Gross NPA are stable with only 0.46% QoQ growth (absolute numbers). But the Gross NPA % has increased from 2.70% in previous quarter to 2.78%. Its not because of fresh additions but due to de-growth in advances QoQ.
  • Advances have not grown much. Advance growth stands at 8.49% YoY.
  • Net interest margins dropped from 2.84% in last quarter to current level of 2.72%.
  • CAR though is well above 9.6%, but should manage to pull it up to 12% to be on safer side.

Early Q3: Small Banks Report Good Quarter Despite De-Monetization

South Indian Bank:

  • Revenue and profit growth at 11.31% and 9.59% YoY respectively.
  • Gross NPA has increased by 2.39% (absolute numbers). Where as the gross NPA % are stable at 3.98%.
  • Higher provisioning has resulted in provision coverage ratio improving from 46.1% last quarter to current level of 50.2%. Still a long way to go for 70% mark.
  • Advance growth at 11.41% YoY.
  • Net interest margin has come down from 2.75% last quarter to 2.66% for current quarter.
  • CAR is at borderline. Need to maintain above 12% for healthy status.

Early Q3: Small Banks Report Good Quarter Despite De-Monetization

RBL Bank:

RBL though got listed this  fiscal year, but has given excellent results.

  • Revenue growth and  profit growth at 34.75% and 58.78% YoY respectively. They grew profits about 43% more than the previous quarter.
  • Gross NPA growth of 3.66% (absolute numbers) is overshadowed by credit growth of 7.63% QoQ.
  • Net interest margin at 3.38%.
  • CAR has declined from 14.55% to 13.80%. 13.80% is still a healthy sign.
  • Provision coverage ratio at 60.96%. In line with industry averages but well below RBI prescribed 70%.

Early Q3: Small Banks Report Good Quarter Despite De-Monetization

Our View: Advantage Small Banks?

While banks get a huge advantage as they grow in size, it’s a time when the big guys are being slowed down by the impact of higher NPAs. As the system removes a bank advantage through measures like UPI (where you can have an account anywhere) or a common ATM/NEFT/RTGS framework, the smaller banks have to just get better at banking (lending, deposits, fees) to scale up.
The new banks of RBL and Lakshmi Vilas look interesting, while older but stable banks like DCB and Federal Bank have continued to show decent results. While the big bank results are still pending (other than lousy results by Axis), the opportunity might just be for smaller banks to push they way up.


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