State Bank of India's (SBI's) size and diversity of exposure hasn't helped its investors in these bad times, given the over 50 per cent fall in market cap in the past six months. In fact, the Street has been fast to de-rate the stock, with stress building in the largest bank's 18.5 per cent exposure of two troubled pockets – micro, small and medium enterprises (MSMEs) and non-banking finance companies (NBFCs).
So, there is a reasonable belief that with Wednesday’s rescue measures to MSME and NBFC sectors, the bank’s recovery in asset quality may not come to jolting halt. While NBFCs may gain from liquidity measures announced Wednesday, which would help them meet the repayment obligations falling due in the next 2 – 3 months, for MSMEs, the relief package may bring a more pronounced comfort.
Analysts at Edelweiss say, SBI, also their top pick, given the risk aversion to other public sector banks, may emerge the clear winner from Wednesday’s move. What’s more, compared to peers, the improvement to book value as a result of relief to MSMEs could be as high as 11.5 per cent for SBI, followed by 7 per cent for Axis Bank. Analysts are reversing some of the conservative estimates made earlier, with the new measures announced for MSMEs and NBFCs.
In terms of stress assessment, too, the bank fares a shade better than Axis Bank, with 17 per cent of its loan book categorised as stressed (exposure to MSME and BB-rated corporate book), while the number stands at 18 per cent for Axis Bank, the third largest private sector lender.
To put things in context, quantified at 5.4 per cent of total banking credit, lending to MSME has been an important source of credit growth for banks until early 2020. “If no policy aid was provided, moderate financial leverage, high operating leverage (from an operational standstill) and frozen receivables would have ensured that a mass extinction event (with over 20 per cent of defaults) in mid-sized Indian businesses,” say analysts at Edelweiss.
Even as analysts remain confident, investors should await clarity on asset quality. Thursday's announcement on agri loan subventions can once again have a negative impact on the credit behaviour of customers, putting further stress to SBI's agri portfolio.
The March quarter results due in a few days and management commentary would be critical to judge the banks asset quality trajectory. Until then, UBS’s view that national service risk (interest holidays and bailouts) is rising for the sector in general and SBI in particular, may hold true.