Short call | What is the next storm brewing for the banking sector? Spandana Sphoorty, Sun Pharma in focus

In Q2FY25, IDFC First Bank, Axis Bank, and IndusInd Bank—all key players—responded with steep contingency provisions

The Street has long preached that for the Nifty 50's rally to keep charging ahead, the outperformance of private sector banks is non-negotiable. With private lenders contributing a whopping 39 percent of the Nifty 50's weight, every tick of their earnings and asset quality is under the market’s microscope.

But just when banks were beginning to breathe easy after navigating through margin pressures and sluggish deposit growth in earlier quarters, a new storm has hit—the microfinance sector.

The sector, which caters to the most vulnerable borrowers, has seen rising delinquencies, overleveraging, and slumping collection rates, posing a direct threat to banks’ asset quality. This creeping stress has pushed banks to slow down microfinance growth, boost collection efforts, and build hefty provision buffers to protect against potential fallout.

In Q2FY25, IDFC First Bank, Axis Bank, and IndusInd Bank—all key players—responded with steep contingency provisions.

IDFC First Bank set aside Rs 315 crore specifically for microfinance-related risks, indicating growing trouble. Axis Bank reported retail slippages of Rs 4,073 crore and prudently beefed-up provisions, preparing for an uncertain road ahead. IndusInd Bank joined the fray, increasing contingent provisions by Rs 525 crore, of which Rs 250 crore was earmarked just for its microfinance portfolio. This preemptive move, according to the bank, aims to secure long-term stability despite the stormy present.

Contingent provisions, which allow banks to build buffers for unforeseen risks, were popularised during the COVID-19 pandemic and now seem to have made a comeback—this time to shield against a microfinance meltdown.

While banks are taking proactive steps, the path forward remains tricky, with Motilal Oswal analysts warning that microfinance stress could persist throughout FY25.

Spandana Sphoorty (Rs 379, -17%)

The company reported a loss in Q2FY25 due to the ongoing MFI stress

Bull Case: Spandana Sphoorty's expected recovery in Q4FY25 could signal improved operational normalization and performance, potentially enhancing profitability as the MFI sector stabilizes, with a rebound in customer confidence driving growth.

Bear Case: Continued MFI stress, high attrition rates, and regulatory pressures on net interest margins pose significant risks, potentially delaying recovery and undermining Spandana Sphoorty's financial stability, warranting a cautious outlook.

Sun Pharma (Rs 1,864, -2%)

Shares fell after Q2 results were released.

Bear case: Launch of specialty hair loss drug Leqselvi remains in a muddle due to a patent dispute. Longer delays could adversely impact the $200 million revenue opportunity from the drug. R&D costs to go up in coming quarters, putting pressure on margins.

Bull case: Firm stands much ahead of peers in its presence within the specialty drug space. Increased R&D investments towards the segment to boost pipeline can ensure long-term growth visibility. A favourable judgement for Leqselvi patent dispute, clearing the way for launch can further provide fresh upside triggers.

(with inputs from Harshita and Vaibhavi)