Banking stocks have come under some selling pressure in the last few sessions on concerns that possible defaults by microfinance institutions (MFIs) after the recent developments in Andhra Pradesh may hurt earnings.
MFIs have seen reduction in interest rates and slowdown in loan recovery in Andhra Pradesh, which accounts for nearly 35 per cent of microfinance lending in India, after the state passed an ordinance last month to regulate the industry.
Analysts have already started factoring in a hit on banks’ earnings due to possible defaults by MFIs in their estimates.
| POTENTIAL RISK EXPOSURE OF BANKS TO MICROFINANCE SECTOR | |||
| Name | Exposure (Rs cr) | As % of loans | Stock price movement# (in %) |
| Axis | 1,000 | 0.90 | -7.91 |
| BoB | 300 | 0.20 | -7.99 |
| HDFC Bank | 1,200 | 0.80 | -1.78 |
| ICICI Bank* | 2,500 | 1.00 | -8.27 |
| PNB | 1,000 | 0.50 | -5.26 |
| SBI | 1,000 | 0.10 | -12.18 |
| YES Bank | 700-900 | ||
# Since close on November 5
Source: Companies, IIFL Research, BS Research
“Our sensitivity analysis shows that risk-to-earnings for a few banks could be significant if the financial position of MFIs deteriorates further. This is likely to be a near-term headwind to earnings and stock prices,” India Infoline (IIFL) analysts said in a note to clients.
“While concerns on MFIs themselves are localised to Andhra Pradesh, for banks, investor concerns would likely be about exposure to MFIs. If MFIs face difficulty in recovering dues, it will cascade into a liquidity and solvency crisis for them,” they said.
The exposure of state-owned banks to MFIs as a proportion of their overall loan book is well below one per cent and appears to be spread over a large group of MFIs. But, private banks like YES Bank and ICICI Bank seemed to have a more concentrated exposure to these institutions, said IIFL.
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Shares of YES Bank, which has 2.3 per cent exposure to the microfinance sector in its overall loan book, according to IIFL Research, have fallen 13.59 per cent since their close on November 5. Other banking stocks like SBI, ICICI Bank, Bank of Baroda and Axis Bank have also fallen 7-13 per cent during the period, as compared to a 5.11 per cent decline in the Bombay Stock Exchange (BSE) benchmark Sensex.
Bank of America (BofA) Merrill Lynch analysts said while the measures taken by the Andhra Pradesh government might impact the profitability of MFIs adversely, the rub-off effect on banks’ underlying asset quality was likely to be limited. “MFIs are unlikely to do willful default on banks, as they remain a key source of funding,” Rajeev Varma and Veekesh Gandhi, analysts at Bank of America (BofA) Merrill Lynch, said in a research report.
According to BofA Merrill Lynch estimates, assuming a 25 per cent cut in all Andhra Pradesh loans, the impact on earnings would be two-four per cent for larger banks and five-eight per cent for smaller ones.