While we see no immediate pressure on SKS Microfinance’s(SKSM) loan growth or margins, we remain cautious on the stock as the issuance of small bank licenses is likely to change the face of the microfinance industry. In addition, NBFCs with 100% exposure to microfinance cannot grow at 30-40% perennially when competition is expected to intensify – making a strong case for a de-rating of SKSM, which is currently trading at 3.2x FY17E P/B.
During Q2FY16, the business momentum was strong with disbursements/AUM growth of 57%/80% YoY in Q2FY16. NIMs on AUM improved to 11.7% from 10.4% in Q1FY16, led by a sharp 140bps QoQ improvement in portfolio yield. A large part of AUM growth was driven by long-term loans which grew 33% QoQ, and their mix in the AUM increased to 27.7% from 23.7% in Q1FY1 .
In the unsecured lending business, slippages are concentrated as well as chunky in any given year over a cycle and the loss given default (LGD) is ~100%. We believe it is prudent for all microfinance cos to create floating provisions which can help them counter volatility in earnings.