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Our view  ‐ 

Substantial portfolio impact from second wave; more provisions to come   

Ujjivan SFB exhibited more than envisaged portfolio impact from second wave with PAR 0 leapfrogging from 15% as of March to 33% as of June (adding back the write‐ offs of Q1) and the loan book contracting by 7% on qoq basis. Portfolio deterioration was seen across the key product segments of micro banking, MSE loans and affordable housing finance with PAR 0 at 37%, 29% and 16% respectively.

Collection Efficiency (on month’s due) at the bank level was depressed in May and June at 72% and 78% respectively, which increased delinquencies and accelerated flow forward of the stress pool. Total restructured portfolio stood at 5.5% as of June (majority slipped to NPL), including 0.5% under restructuring 2.0. Further restructuring of 7‐8% is envisaged for customers who were non‐delinquent as of March. The significant increase in PAR 90 (5 ppt incl. w‐off i.e. Rs7bn+) and raising of PCR from 60% to 75% drove huge provisions in the quarter leading to a loss.  

While collection efficiency has improved in July to 101% (incl. additional collections) at the bank level, it needs to not just sustain but further improve for PAR 30 correction and to arrest the incremental credit cost. However, considering low provisions of 85 bps on the standard portfolio (despite PAR 1‐90 at 21%) and likelihood of third wave, the bank may to have incur additional significant credit cost in remaining fiscal.  

We do not envisage a substantial decline in credit cost in FY22 (5.5% in FY21), and thus expect the bank to report a marginal profit in the year. With another year of impeded equity accretion (<1% RoE) notwithstanding book growth, the Tier‐1 capital will substantially decline again. We downgrade the stock to Reduce from ADD not only based on near‐term pain, but also due to vulnerability exhibited by non‐micro banking portfolios and bank’s relative struggle with ramping‐up its granular deposit base.  

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