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Add Ujjivan Small Finance Bank Ltd For Target Rs.44

Buy Ujjivan Financial Services Ltd For Target Rs.394

Accelerated provisions dent earnigns

UJJIVANS’ 3QFY21 reported a net loss of INR 2.8bn (vs. our estimate of a PAT of INR 703mn) on account of accelerated provisions (INR 5.8bn) against potential stress (pro forma slippages and restructuring), and interest reversals. The bank’s performance in terms of granular deposit traction and operating efficiency remained creditable- although sustainability will be the key. We continue to watch for potential corporate action at both UJJIVANS and UJJIVAN, especially in context of the recent RBI IWG report on the ownership of private banks. We maintain BUY on UJJIVAN with a target price of INR 394 and ADD on UJJIVANS with a target price of INR 44 (adjusted for 25% holding company discount).

* Pro forma stress rises: UJJIVANS, like some of its micro-lending peers clocked a sharp rise in stress, with pro forma GNPAs touching 4.8%, led by the micro-credit segment which constitutes 72% of the bank’s portfolio. PAR 0 remained sticky at 16.2% (vs. 16.8% in 2QFY21 and 2.1% in 3QFY20). However, when viewed on a monthly basis, the bank held onto gains in overall collection efficiency, which came in at 92% in January vs. 88% in October. Further, the bank restructured ~8.5% of its micro-credit portfolio. We have revised our GNPA estimates upwards to 5.5% in FY21E.

* Provisions jump: UJJIVANS made accelerated provisions of INR 5.8bn (~17% of loans, annualised). It thus held a total cover amounting to ~8% of loans. After utilising ~INR 690mn of provisions towards restructured loans, the bank held a pro forma PCR of 59%. Elevated slippages from the pool of restructured micro-credit assets could keep credit costs elevated. We build LLPs of 2.7% over FY22-23E.

* Deposit growth improves: The bank registered a slight improvement in deposit traction, with YoY growth at 9% vs. 6% in 2QFY21, which in turn was led by 69.4/23.3% growth in SA balances. Consequently, the CASA rose 122bps sequentially to 17.7%, ensuring significant CoF tailwinds (-30bps QoQ). We will continue to monitor UJJIVANS’ efforts in building a granular low-cost liability base.

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