Old private Southern banks like Federal, LVB set for better times

The South-based mid-sized private sector lenders are poised to see accelerated earnings growth going ahead as their asset quality ratios have peaked out and loan growth is likely to revive after remaining muted over the past couple of years, said a report.

Also, the niche positioning in their respective home markets will help banks like Federal Bank, Lakshmi Vilas Bank (LVB), South Indian Bank, City Union Bank and Karur Vysya Bank to grow faster, said the report by ICICI Securities.

“We prefer banks with superior earnings growth, sustainable NIMs, stable asset quality, granular loan mix and adequate capital. We expect these five banks to witness a loan CAGR of 11-22 per cent and earnings CAGR of 12-25 per cent over the next two years,” it said.

The brokerage says these banks expertise in small- ticket loans to the self-employed segment and good relationship-based banking model will ensure higher-than- industry growth.

And therefore maintains a buy/hold on all these four lenders with Federal City Union getting a buy call and the other two a hold call.

“Asset quality improvement for these banks will be aided with strategic shift to retail/SME lending, lack of participation in large consortium-based lending and relatively small stressed-asset portfolios (5/25, SDR, S4A, standard restructured book etc) will come in handy.”

While the report sees a potential upside of 18, 19 and 18 per cent respectively for Federal, City Union and Karur, it sees 1 per cent upside to SIB and 5 per cent gain for LVB.

The niche positioning in the respective home markers has ensured that despite intense competition, coupled with their unique relationship-based business model and expertise in SME/retail lending, these banks have consistently maintained or gained market share in home states and at system level, noted the report.


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