SFB stocks on upswing, rally likely to continue
Analysts see growth potential and advise investors to retain their holdings
Shares of small finance banks (SFBS) flexed muscles in April, after March quarter results showed they had double-digit growth in advances and deposits.
Suryoday Small Finance Bank stock price has jumped 20.4 per cent so far this month, while that of Ujjivan SFB has surged 18.3 per cent. ESAF Small Finance Bank, Jana Small Finance Bank, AU Small Finance Bank, Utkarsh Small Finance Bank, and Equitas Small Finance Bank have moved up in the range of 6.4 per cent to 10.2 per cent. By comparison, the Nifty 50 has slipped 0.8 per cent, while the Nifty 500 has added 0.8 per cent, ACE Equity data shows. Analysts see growth potential in SFB stock prices, but advise investors to retain their holdings. New investors may wait for a better entry point, they said.
“India has strong catalysts for economic growth, thereby supporting credit demand outlook in the foreseeable future. We believe that small finance banks have a much bigger role to play in the overall banking sector,” said Mohit Khanna, fund manager at Purnartha One Strategy.
“At the current juncture, we remain invested in small finance bank stocks and would add to our positions in the pack if we get a better entry point due to market volatility,” he said.
Growth in Q4
Analysts said SFBS are gaining market share in the overall lending space by focusing on mobilising deposits. Such lenders offer term deposits at nearly 250 basis points higher than large banks.
Premium rates, coupled with accelerated investment towards liability-focused branches, led to steady build-up of the deposit base and gradual improvement in credit-deposit (CD) ratio.
Preliminary updates showed that AU Small Finance Bank reported a 25 per cent year-onyear (Y-O-Y) and a 9 per cent quarter-on-quarter (Q-O-Q) growth in gross advances in Q4 FY24. Deposits grew 26 per cent Y-O-Y and 9 per cent Q-O-Q.
Equitas Small Finance Bank’s advances grew 23 per cent Y-O-Y and 5 per cent Q-O-Q, while deposits jumped 43 per cent YO-Y and 12 per cent Q-O-Q.
Suryoday Small Finance Bank reported advances grew 41 per cent Y-O-Y and 14 per cent Q-OQ.
Deposits grew 50 per cent Y-OY and 20 per cent Q-O-Q.
“Apart from comparatively better deposit rates than other private and PSU banks, the regulator's mandate to maintain a balanced CD ratio has prompted SFBS to aggressively ramp up deposits,” said Dnyanada Vaidya, research analyst — BFSI at Axis Securities. Analysts expected deposit growth momentum to continue as long as credit demand continues. An inability to do so could either restrict growth or weigh on margins, they said.
“We believe cost of funds is near its peak, and margins could stabilise in the next couple of quarters. Investors can buy small finance bank stocks where the risk-reward is favourable,” said Vaidya of Axis Securities. She prefers Equitas among the SFB lot.
The price to earnings (P/E) multiple of all SFBS stocks but Suryoday and Utkarsh are in line with their five-year historical average. For FY24, Careedge Ratings expects SFB advances and deposits to grow at 22-25 per cent and report stable profitability with return on total assets in the range of 2.1 per cent to 2.4 per cent.
No blanket benefit
That said, small finance banks’ CD ratio remained elevated at 89 per cent on average at the end of the December quarter (Q3 FY24). Certain financiers had an elevated ratio: Suryoday at 111 per cent, Utkarsh 99 per cent, and Equitas 90 per cent. ICICI Securities said asset under management growth could slow down for small finance banks that have a CD ratio of 100 per cent.
“Overall, assuming 25 per cent loan CAGR between FY23-25E and CD ratio at 85 per cent by March, 2025, we expect the sector to clock 31 per cent deposit CAGR for between FY23-25,” said the brokerage.