SKS Microfinance shares, which fell over 15 per cent on Friday after failing to get small finance bank license surged as much as 7 per cent on Monday. SKS Microfinance soared after global brokerage Credit Suisse upgraded the stock to 'outperform' from 'neutral' earlier.
Credit Suisse in a report on Friday said SKS Microfinance not receiving small finance bank license will not weaken its competitive position as the micro lender enjoys a 300-400 basis points funding cost benefit over smaller microfinance institutions.
"SKS probably enjoys 300-400 bp (basis points) funding cost benefit over the smaller MFIs (microfinance institutions) that have won the small bank licence. We believe the benefits from bank conversion for MFIs, if at all, are not immediate but accrue over the long term (5+ years in most cases). Thus, we do not feel SKS's competitive positioning would be negatively impacted in any material way in the foreseeable future (on parameters like borrowing costs, etc.)," the report said.
SKS Microfinance shares fell 15.47 per cent on Friday on fears that not getting small finance bank license will reduce its competitive position as it cannot raise low cost deposits from current account and savings account compared to those MFI who made the cut.
However, Credit Suisse believes that given the high operating cost of a microfinance company and the statutory requirements of CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio)for a bank would have hit SKS Microfinance immediately and the benefits of low cost deposits would have been negligible for next five years if the company would have won a small finance bank license.
Credit Suisse said SKS Microfinance's conversion into a bank would have led to a 36 per cent dilution ($260 million issue) in order to meet foreign ownership requirement, which would have been an immediate negative on the stock.
However, it added that if SKS would have got a small bank licence, the political risk on the company would have reduced.
Credit Suisse has a target of Rs 480 on SKS Microfinance shares, which indicates a potential upside of 26 per cent from Friday's closing price.
Antique Stock Broking in a report also said that SKS Microfinance's failure at getting a small bank license does not imply doom and high level of customer engagement will continue to remain the cornerstone of success for the company.
Antique Stock Broking has a 'buy' rating on SKS Microfinance with a target price of Rs 528.
SKS Microfinance shares closed 4.28 per cent higher at Rs 396.95 apiece, compared to 0.06 per cent fall in the broader Nifty. (With agency inputs)
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