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Incremental stressed asset formation remained elevated; collections in July improved sharply

Ujjivan Small Finance Bank (Ujjivan) reported net loss of Rs2.3bn largely due to accelerated provision of Rs4.7bn, including creation of Rs2.5bn floating provision to absorb near-term stress. However, the same is utilised while arriving at NNPL of 2.7% as at Jun’21.

Considering partial or full income loss of its customer base during covid second wave, the bank expects incremental restructuring of ~7-8% by Sep’21. Current restructured pool stands at 5.5% of advances with collection efficiency at 50% as at Jun’21. With gradual opening up of the economy, collections improved sharply to 93% in Jul’21 from 78% in Jun’21 across product categories.

Ujjivan’s journey towards building secured assets (30% of loans) and granular liability franchise (retail deposit share at 48%) is progressing well. Near-term asset quality concerns persist given lack of provision buffer and PAR-0 at 25%. However, incremental focus on secured assets and encouraging trend in collections, reinforces our view that the higher stressed asset formation is transitory in nature and Ujjivan would deliver normalised RoA by FY23E. Maintain ADD with revised TP of Rs31 (earlier: Rs35).

* Stressed asset formation remained elevated. Ujjivan’s GNPL increased to 9.8% (NPL in MFI at >11%) vs 7% in Q4FY21 despite it writing off Rs2.8bn (2% of loans), while NNPL fell to 2.7% due to accelerated provision of Rs2.5bn. While the bank restructured only Rs0.7bn under 2.0, pipeline remains elevated at ~7-8% of loans. Collections in restructured portfolio under 1.0 (~5.5% of loans) remained at 50% as at Jun’21. PAR-0 too remains stretched at 31% as at Jun’21. However, with gradual opening up of the economy, collections improved sharply to 93% in Jul’21 from 78% in Jun’21. Notably, states having significantly lower collections in Jun’21 also reported strong recovery in Jul’21, e.g. collections in Kerala improved to 86% in Jul’21 (39% in Jun’21), Tamil Nadu 94% (60%), Karnataka 102% (66%), West Bengal 90% (74%). Management did not give any guidance on credit cost for FY22.

* Progression towards building secured assets and granular liability franchise is encouraging. While disbursements during Q1FY22 fell sharply by 69% QoQ, it continued to tilt towards secured assets as reflected in ~75% drop in MFI-related disbursements. As a result, AUM fell 7% QoQ, but share of secured assets increased to 30% as at Jun’21 from 27% in Mar’21. Going forward, Ujjivan will continue to focus on scaling up affordable home loans, gold loans, vehicle loans and MSME loans. Deposits grew 4% QoQ to Rs137bn with CASA ratio at 20% and share of retail at 48%.

Its concentrated efforts to improve average balances by offering value-added products have started yielding positive results as reflected in average SA balance at Rs18k vs Rs15k in Q4FY21. Further, average balance of incremental SA customers in Q1FY22 stands at much higher level of Rs42k vs Rs21k in Q4FY21. Ujjivan is also tying up with fintechs to expand customer acquisition channels and focuses on scaling up products like personal loans and credit cards to improve customer engagement and cross-sells.

* Digital journey leapfrogging. Ujjivan’s digital capabilities and faster adoption reflects in >4x YoY growth in active UPI customers, 3.2x YoY growth in active net banking users, and 1.5x YoY growth in POS transaction value. Further, in SFB space, Ujjivan SFB ranked no. 1 in terms of transactions volume in Mar’21 with 45-50% market share. It completely automated 16 business vertical processes of which 2 are completely unattended (RTGS, NEFT Recon) and is systematically moving to scorecard-based underwriting across all products. It had collaborated with 6 fintechs – 3 for loan repayments and 3 for digital lending under personal loan and MSE categories.

* Earnings impacted by accelerated provision. Ujjivan reported net loss of Rs2.3bn due to accelerated provision at Rs4.7bn and 36% QoQ drop in other income. However, NII remained strong at 4% QoQ despite 7% QoQ drop in AUM. Total operating costs fell 9% QoQ with other operating costs down 16% QoQ and staff costs down by a marginal 3% QoQ. Cost-income ratio stood at 64.6%. Cost of CASA increased sharply to 5% in Q1FY22 vs 4.2% in Mar’21.

* Key risk – A) higher slippages from restructured portfolio and B) delay in loan growth revival.

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