The pandemic-led disruption to the economy, coupled with a moratorium on loans, has created a cloud of uncertainty in the banking sector, especially in mid- and small- size banks. Adding to it, with the Supreme court ordering banks not to recognise bad loans, the full extent of non-performing loans in the sector remains to be seen in coming quarters. Given this, the Street has been cautious about many such banks.
In continuation of the first part where we looked at the business performance of four southern banks, in this story, we have delved into three more such banks, namely Karnataka Bank, Federal Bank and South Indian Bank.
Karnataka Bank
In its 96 years of existence, the bank has built a network of 859 branches across 22 states, most of which are based in Karnataka. Amid the COVID-19-led disruption, the bank is trying to make a slew of changes. Also, it is shifting its focus towards higher-yielding retail (< Rs 5 crore) and MSME loans (Rs 5-100 crore), with together they accounting for 82 per cent of September 2020 advances. To lower its cost of the deposit, the bank improved its CASA (current account saving account) ratio to 29.2 per cent in September 2020 as compared to 27.4 per cent in the year-ago period. As a result, the interest spread further improved to 4.02 per cent in September 2020 from 3.52 per cent in the year-ago period.
Over the last few years, the bank's asset quality has deteriorated, owing to higher stress in its corporate loan book. Slippage ratio (downgrade of loan quality as per cent of total advances) increased to 3.5 per cent in FY20 from 2.6 per cent in FY19. Owing to the moratorium, slippages were lower in Q1FY21 to 0.45 per cent and negligible in Q2FY21. As of Q2FY21, Karnataka Bank had around 11.4 per cent of its loan book under moratorium. Stress on its loan book is expected to increase in H2FY21 once the moratorium is lifted. However, to support its balance sheet, the bank already has shareholder approval to raise Rs 1500 crore through QIP valid till March 2021. The stock trades at a P/B of 0.3 compared to a five-year median of 0.6.
Federal Bank
With a loan book of around Rs 1,22,912 crore as of September 2020, Federal Bank is one of the biggest southern banks. Based in Kerala, the bank has 1,271 branches across the country, with the majority of them based in Kerala. The bank has a strong deposit franchise, comprising over 90 per cent of retail deposits. In fact, the bank dominates in the remittance deposits segment and in March 2020, non-resident deposits crossed Rs 60,000 crore. On the advances side, low exposure to vulnerable sectors like metals and textile has enabled the bank to maintain stable asset quality over the years.
Amid the COVID-19-led disruption, the bank's net profit in Q2FY21 declined by 26 per cent on account of higher provisions. The bank's asset quality optically looks improved, with the net NPA falling to around 1 per cent in Q2FY21, owing to the Supreme court's order to halt recognising bad loans temporarily. However, the collection efficiency has improved to 95 per cent of the pre-COVID levels. On the lending side, the bank remains risk-averse, with it mainly lending to retail and agriculture customers. The bank's current CEO & MD, who has been at the helm since 2010, has recently been reappointed by the RBI for the period till September 2021, which ensures management certainty. The stock trades at a P/B of 0.85 compared to a five-year median of 1.32.
South Indian Bank
Established in 1929, the bank is headquartered in Thrissur, Kerala and had a network of 874 branches as on September 30, 2020. Its advances stood at Rs 63,869 crore as on September 30, 2020, with retail, small and medium enterprises, and agricultural advances accounting for 75 per cent of the total advances. The proportion of corporate loan book at 25 per cent, although sizable, has declined from 31 per cent as on September 30, 2019. The management intends to cap the exposure to large corporate accounts at 25 per cent so as to maintain the existing degree of granularity and stability in the portfolio. On the other hand, deposits stood at Rs 82,621 crore as on September 30, 2020, with deposits from NRIs accounting for 30.6 per cent of its total deposits.
Murali Ramakrishnan, new Managing Director and CEO, who brings with him vast experience in retail banking, has identified many focus areas, including infusing capital to strengthen the balance sheet, conducting a focused drive to build strong and low-cost CASA book, leveraging the strong distribution network to increase business, strengthening NRI relationships, and augmenting the talent of young resources. In line with these initiatives, the bank has recently come up with a Vision 2024 document as well.
Lower costs of funds pushed YoY net interest-income growth by 13.5 per cent in Q2FY21. However, with the provision level remaining high, the net profit slipped by 23 per cent. However, the current account saving account ratio (CASA), which provides money at low cost, has improved to 27.8. Around 26 per cent of the loan book remained under moratorium as of September 2020. Hence, there is still uncertainty over how much of it will turn bad. The stock trades at a P/B of 0.3 as compared to a five-year median of 0.63.
Read the first part of this article
Banks of South India - 1
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
