Shares of small finance banks have had a rough run in the past year, with prices correcting 24-45 per cent.

“The race for deposits has hurt the small finance banks, with several banks offering 7-8 per cent on savings and fixed deposits. Most SFBs have exposure to microfinance and personal loans, which is a segment that has seen a drop in asset quality in the last few quarters,” said Deepak Jasani, an analyst.

According to Jasani, the larger private sector banks seem relatively more attractive now given that their share prices have not moved much in the last one and a half years. Such banks offer size, scale, better corporate governance and are a safer play than SFBs, he said.

Brokerage Motilal Oswal Financial Services believes that asset quality pressures are likely to continue for small finance banks.

AU Small Finance Bank’s net profit for the quarter ended December is likely to grow 30.2 per cent y-o-y to ₹4.88 billion aided by merger with Fincare SFB, according to the brokerage. Net interest income is expected to grow 53 per cent y-o-y while net interest margins may decline marginally. Asset quality, however, may witness a slight deterioration with high delinquencies in MFI and card segments.

Equitas Small Finance Bank may report a modest quarter, with PAT expected to dip by 60 per cent y-o-y as provisioning expenses remain elevated on both fresh slippages and MFI slippages in the erstwhile quarters as per the provisioning policy. The brokerage estimates advances growth at 20 per cent y-o-y while NIMs may moderate by 18bp q-o-q.

“For SFBs, net interest margins are under threat and asset quality is deteriorating at a faster pace than the larger banks. The outlook for such banks will depend a lot on credit growth and stabilisation of asset quality,” said Jasani.

The Nifty Bank index underperformed the broader Nifty index in CY24. Barring a few, most banks are trading closer to their mean valuations.

“We believe slower credit growth, along with margin/asset quality pressure, is likely to weigh on banks’ earnings in the near term. This is already reflecting in their stock performance. We believe unsecured stress, including MFI, should largely play out over the coming two quarters, gradually easing thereafter. We prefer stocks that are better positioned to withstand near-term asset quality deterioration,” said Emkay Global Financial Services, in its third-quarter preview for banks.