First, with uncertainty over the duration of the coronavirus pain and its impact on the overall economy, the ability of smaller banks to withstand the shock has become a key for investors.
Krishnan ASV, lead analyst at SBICAP Securities, believes: “Large banks with high capitalisation and a strong deposit franchise have greater ability to absorb the economic growth shock, which investors are looking for in light of the current situation.” In fact, a moratorium-like episode at a private sector bank is often followed by a temporary crisis of confidence for depositors of other private banks, which demands a slew of confidence-restoring measures by policymakers and other stakeholders, says Krishnan, adding that banks collectively investing in YES Bank was one such measure.
Having said that, the write-off of YES Bank’s tier-1 bonds would make fundraising difficult, especially for smaller private banks.
Second, according to analysts at Dolat Capital, besides growth and asset quality concerns, high exposure to small and medium enterprises (SMEs) has led to a correction in mid-sized banks. The SME sector is expected to be more vulnerable to the current crisis as the lockdown could wipe out a sizeable chunk of their cash flow in the near term. Lenders like Bandhan Bank and RBL Bank also have a high segmental concentration in microcredit and personal loans, respectively, which could see pressure if there are any job losses or pay cut, say analysts.
In this backdrop, investors are recommended to stay away from small private banks until the situation improves, select stocks like Federal Bank could be a good option to bottom fish.