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Sub-par liability profile, higher MFI portfolio pose risk

Well-capitalized; IPO to meet RBI’s listing norms: Despite carrying strong capital ratios (CAR at 41% incl. Tier I at 37% vs. min. CAR requirement of 15%), Suryoday has raised Rs1.5bn in the pre-IPO placement at a price of ~Rs292/share and plans to raise additional Rs5.7-5.8bn (via fresh issue of 8.15mn shares and OFS of 10.9mn shares) at a price band of Rs303-305. The primary purpose of the IPO is to meet the RBI’s listing requirement within three years of starting banking operations. Post IPO, the bank’s CAR/Tier I should improve to 54%/50% (highest among peers) and promoter stake should fall by 230bps to ~28%, well below the regulatory requirement. Unlike Equitas/Ujjivan SFB, Suryoday does not have the holdco-sub structure to meet promoter holding norms.

Diversifying asset portfolio, but still remains MFI dominant: Suryoday’s asset portfolio (~Rs39bn) remains MFI dominant at 71% of loans (similar to Ujjivan), with urban-rural mix of 70:30 and geographically concentrated in Maharashtra (35%), TN (27%) and Odisha (15%). The bank has gradually diversified into other products (CV, Affordable Housing, etc.) but their share is relatively small. Given the inherently high risk in MFIs and recent events impacting the portfolio, the bank needs to accelerate the product/geographic diversification.

Sub-par liability profile and higher NPAs could cast pressure on NIMs in long run: The bank’s deposit-to-AUM ratio improved to 88%, but CASA remained abysmally low at 13% (12% of AUM), similar to Ujjivan. Deposits per branch too remain the lowest among peers at Rs60mn vs. Rs100mn-Rs200mn for peers and thus need to be ramped up. We believe that the sub-par liability profile along with an expected surge in NPAs and changing asset mix to non-MFI could cast pressure on NIMs/core RoA in the long run.

Higher NPAs and thus LLP could weigh on RoAs in the near-medium term: The bank’s pro forma GNPAs surged to 9.3% in Q3FY21 vs. reported at 0.8% mainly due to higher stress in its MFI portfolio, affected by Covid-19. The cumulative Covid-19-related provision buffer stands at Rs1.4bn (3.7% of AUM), while pro forma PCR (specific + contingent) at 60% is lower than peers (Ujjivan-68%). The bank reported RoA/RoE of 1.2%/6.3%, down from 2.4%/11% in FY20 and could remain sub-par amid pressure on core-earnings and elevated LLP in the near to medium term.

Outlook and Valuations: Post capital raise, Suryoday’s capital ratio (Tier I ~50%) will be far higher than that of peers. However, its sub-par liability profile and MFI-dominant asset portfolio with rising risks due to regular asset quality shocks could put pressure on growth and return ratios in the near to medium term. At the upper price band of Rs305, IPO valuations will be 2.6x pre-IPO/private placement and 2.2x Dec’20 P/ABV post-IPO, adjusted for pro forma NNPAs and RSA (vs. larger listed SFBs like Ujjivan at 2.6x ABV and Equitas at 2.4x). Among SFBs, we rather prefer Equitas (Buy) for its healthy asset diversification, better liability profile and reasonable valuations. We have a Sell rating on Ujjivan.

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