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MD resignation, higher attrition add to persistent asset-quality woes

Key takeaways from the Ujjivan SFB con-call amid the resignation of Mr. Nitin Chugh, MD & CEO. Our views are given below:

* Mr. Samit Ghosh, founder of Ujjivan, presided over the call. Though the press release indicated that Mr. Chugh’s (ex-Digi-Banking Head at HDFCB) resignation was due to personal reasons, the impression from the call was that it was mainly due to the bank’s persistent underperformance on the asset-quality front, delayed recognition/correction of NPAs in MFI, and large-scale attrition at the lower-middle level.

* In our view, apart from the bank’s underperformance, some niggling issues with the old management and his incompatible new-age management style in the still MFI-dominated old school bank, could also have contributed to the resignation.

* Mr. Chugh will continue till September 30, and the bank’s board is expected to appoint an Interim CEO in its board meeting on August 25. The top contender for the interim CEO post seems to be an old hand – Ms. Carol Furtado, Head of Operations at the bank.

* As per Mr. Ghosh, the new permanent MD & CEO could be an internal or external candidate and the appointment would take at least 3-6m, factoring in the time for the selection process and getting RBI approval. The impression from the call was that the bank could be more inclined toward an internal candidate, and possibly Ms. Furtado could be a preferred choice as permanent CEO. She had worked with foreign banks before joining Ujjivan in 2005. Our checks suggest that she has good experience in the MFI space, but her skills in mobilizing liability and managing a bank altogether could be put to test.

* In addition to top-level exits in the board and recently the CFO, the bank is facing a massive exodus of lower-middle level employees, which has more to do with the work environment than remuneration. Mr. Ghosh indicated that the bank would be keen to reonboard the employees, unless they have taken jobs somewhere else.

* After exits from the board, the bank has on-boarded four directors, including Mr. Ghosh and erstwhile CEO/CFO Ms. Sudha Suresh, to strengthen the board, oversee the management transition and make an attempt to resurrect the bank.

* The bank’s overall recognized stress pool stands at 15.6% of the loan book (including GNPA of 9.8%/restructured loans of 5.8%) and the portfolio-at-risk (PAR> 0dpd) has swelled to 30% as of Jun’21. Under the new management, the bank would look toward upfront stress recognition and accelerated provisioning, which means that it would reel under losses for some more time. We trim our estimates for FY22-24E, factoring in likely higher NPA recognition and provisioning.

* We believe that the bank's early-stage faltered strategy to mobilize deposits from MFI customers, lack of credible leadership to manage the liability business, and higher dependence on the vulnerable MFI business have led to its current status as a troubled SFB. The Covid-induced disruption aggravated its asset-quality problems. We believe the bank will take time to emerge from these issues and will also make its aspired transition into a Universal Bank difficult.

* Given the management-related uncertainty, weak liability profile, persistent asset-quality issues and sub-par return ratios, we retain our Sell rating on Ujjivan SFB and cut our TP from Rs23 to Rs17 (valuing the bank now at 1.1x Sep’23E ABV vs. 1.4x earlier). We also downgrade Ujjivan Financial Services (holdco) to Sell from Hold, while reducing the TP to Rs160 from Rs217 (applying a 20% holdco discount).

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