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SKS Microfinance (SKSM)
Banks/Financial Institutions
Provisions on AP loan book pull down earnings. SKS reported PAT of Rs341 mn,
down 38% yoy. Stable NIM and marginal qoq loan book decline due to lower
disbursements have driven core earnings – up 8% qoq and 59% yoy. However, large
provisions have pulled down reported earnings. We find two risks to SKS’s business
model (1) lower non-fund based income and (2) high credit losses as the scenario in AP
has not improved for longer-than-expected period. We will revisit our estimates and
price target after conference call with the management.
Credit provisions pull down earnings
SKS reported 3QFY11 PAT of Rs341 mn as compared to Rs810 mn reported in 2QFY11 and Rs555
mn reported in 3QFY10. Large credit provisions/write-off (Rs1 bn in 3QFY11) was the key reason
for lower earnings. The break-up of provisions is as follows:
In order to comply with the Malegam Committee recommendations, SKS has made provisions
of Rs269 mn so as to maintain aggregate outstanding provisions at 1% of the loan book.
SKS has provided about Rs610 mn for deficit in collections on off-balance sheet loans.
Routine NPL provisions (Rs35 mn) and loan write-offs accounted for the balance.
SKS has reclassified loans in AP as ‘monthly’ receivable loans as the AP MFI Act restricts collections
on a weekly basis. Consequently, the company has adopted an NPL recognition policy of 90 dayspast-
due basis on these loans – a policy applicable for loans which have monthly collections.
Notably, MFI loans which are collected weekly are classified as NPL on 8 weeks-past due basis.
Thus, the loan portfolio in AP is still considered standard. Gross NPL were low at 0.4% in
December 2010.
Loan book declines marginally qoq, margin stable
SKS reported a marginal decline in loan book to Rs50 bn from Rs54 bn in 2QFY11. The company
made disbursements of Rs15 bn in 3QFY11 as against Rs31 bn in 2QFY11. Lower liquidity during
the quarter was likely the key reason for decline in disbursements.
SKS reported NIM (KS estimate) of 20.2% as against 20.1% in 2QFY11. Non-fund based income
was at Rs280 mn, marginally below Rs310 mn in 2QFY11. Cost-to-income ratio has improved
marginally to 48% from 50% in 2QFY11.
Downside risk from recent business policy changes and credit losses in AP
SKS recently made announcements about dropping lending rates and stopping most nonfund
based activities. We believe that lower income from non-fund based sources can pull
down long-term RoE though it is challenging to predict the improvement on account of
better operating leverage and contribution of non-MFI business—this can be about 10% of
overall loan book. The situation in AP has not improved for longer-than-expected period,
thereby increasing the risk of NPLs which can impact near-term earnings.
SKS has proposed to reduce effective lending rates to 24.5% across the country from Jan
2011. The lending rates were about 25-26% earlier, income from non-fund based
activities, largely insurance distribution, boosted profitability—1.2% of average assets in
FY2011E and FY2012E; this was about 2% of average assets in FY2010.
The Malegam Committee has restricted income heads to (1) interest income, (2) upfront
fees at 1% of loans and (3) insurance distribution. As per recent IRDA circular, group
administrators (SKS) cannot collect any charges from the group members (borrowers).
Thus, going forward the income from insurance distribution will be significantly lower—
largely restricted to commission paid by the insurance company. Income from distribution
of capital goods can provide an upside over the longer term.
We are stressing our earnings estimates in the following scenarios. In scenario I, we are
modeling the income of SKS to factor (1) 10% credit losses in AP loan book, (2) 24.5%
lending yield, (3) sharp decline in non-fund based income and lower loan growth—we are
reducing annual loan growth to 45% and 30% in FY2011E and FY2012E from 67% and
42%, respectively. For FY21013E we are modeling loan growth of 85% (on a low base) as
compared to 68% factored in our base case. The FY2013E loan book will likely be Rs153 bn
as compared to Rs172 bn estimated by us. In the scenarios II and III, we are further stressing
the earnings to 20% and 30% credit losses in AP.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
SKS Microfinance (SKSM)
Banks/Financial Institutions
Provisions on AP loan book pull down earnings. SKS reported PAT of Rs341 mn,
down 38% yoy. Stable NIM and marginal qoq loan book decline due to lower
disbursements have driven core earnings – up 8% qoq and 59% yoy. However, large
provisions have pulled down reported earnings. We find two risks to SKS’s business
model (1) lower non-fund based income and (2) high credit losses as the scenario in AP
has not improved for longer-than-expected period. We will revisit our estimates and
price target after conference call with the management.
Credit provisions pull down earnings
SKS reported 3QFY11 PAT of Rs341 mn as compared to Rs810 mn reported in 2QFY11 and Rs555
mn reported in 3QFY10. Large credit provisions/write-off (Rs1 bn in 3QFY11) was the key reason
for lower earnings. The break-up of provisions is as follows:
In order to comply with the Malegam Committee recommendations, SKS has made provisions
of Rs269 mn so as to maintain aggregate outstanding provisions at 1% of the loan book.
SKS has provided about Rs610 mn for deficit in collections on off-balance sheet loans.
Routine NPL provisions (Rs35 mn) and loan write-offs accounted for the balance.
SKS has reclassified loans in AP as ‘monthly’ receivable loans as the AP MFI Act restricts collections
on a weekly basis. Consequently, the company has adopted an NPL recognition policy of 90 dayspast-
due basis on these loans – a policy applicable for loans which have monthly collections.
Notably, MFI loans which are collected weekly are classified as NPL on 8 weeks-past due basis.
Thus, the loan portfolio in AP is still considered standard. Gross NPL were low at 0.4% in
December 2010.
Loan book declines marginally qoq, margin stable
SKS reported a marginal decline in loan book to Rs50 bn from Rs54 bn in 2QFY11. The company
made disbursements of Rs15 bn in 3QFY11 as against Rs31 bn in 2QFY11. Lower liquidity during
the quarter was likely the key reason for decline in disbursements.
SKS reported NIM (KS estimate) of 20.2% as against 20.1% in 2QFY11. Non-fund based income
was at Rs280 mn, marginally below Rs310 mn in 2QFY11. Cost-to-income ratio has improved
marginally to 48% from 50% in 2QFY11.
Downside risk from recent business policy changes and credit losses in AP
SKS recently made announcements about dropping lending rates and stopping most nonfund
based activities. We believe that lower income from non-fund based sources can pull
down long-term RoE though it is challenging to predict the improvement on account of
better operating leverage and contribution of non-MFI business—this can be about 10% of
overall loan book. The situation in AP has not improved for longer-than-expected period,
thereby increasing the risk of NPLs which can impact near-term earnings.
SKS has proposed to reduce effective lending rates to 24.5% across the country from Jan
2011. The lending rates were about 25-26% earlier, income from non-fund based
activities, largely insurance distribution, boosted profitability—1.2% of average assets in
FY2011E and FY2012E; this was about 2% of average assets in FY2010.
The Malegam Committee has restricted income heads to (1) interest income, (2) upfront
fees at 1% of loans and (3) insurance distribution. As per recent IRDA circular, group
administrators (SKS) cannot collect any charges from the group members (borrowers).
Thus, going forward the income from insurance distribution will be significantly lower—
largely restricted to commission paid by the insurance company. Income from distribution
of capital goods can provide an upside over the longer term.
We are stressing our earnings estimates in the following scenarios. In scenario I, we are
modeling the income of SKS to factor (1) 10% credit losses in AP loan book, (2) 24.5%
lending yield, (3) sharp decline in non-fund based income and lower loan growth—we are
reducing annual loan growth to 45% and 30% in FY2011E and FY2012E from 67% and
42%, respectively. For FY21013E we are modeling loan growth of 85% (on a low base) as
compared to 68% factored in our base case. The FY2013E loan book will likely be Rs153 bn
as compared to Rs172 bn estimated by us. In the scenarios II and III, we are further stressing
the earnings to 20% and 30% credit losses in AP.
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