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Recommendation Rationale

* H2 Credit Cost to be Meaningfully Lower: The largest contributors to UJSFB MFI slippages were GJ, KA, and TN. The bank also witnessed stress flowing in from non-focus markets of KL and OR. The management indicated that the slippages in most of these states peaked in Mar’25, except KA, which peaked in Q2 and is gradually reverting to normalcy. The X-bucket CE in most of the states has normalised at 99.5%, including TN, KA, Western states (ex-GJ), Eastern states (ex-OR), and North. The collections in the SMA pool have seen an improving trend. Currently, the SMA pool stands at <2%, the lowest since Q1FY25. The bank has not seen adverse trends in the secured portfolio, and slippages have averaged Rs 50 Cr/quarter over the last six consecutive quarters. Thus, with incremental stress accretion in the MFI book declining and the secured book performing well, the management remains confident of credit costs tapering meaningfully in H2 and has reiterated its guidance of credit costs settling at 2.3-2.4% in FY26 vs. ~2.76% in H1FY26.

* Growth Momentum to Build-up: UJSFB’s loan origination continues to witness strength, with disbursements across segments improving. The bank is also seeing demand pick-up in the MFI segment and remains optimistic of growth accelerating in H2, as UJSFB looks to exit FY26 with MFI book growth of 7- 8%. Within the MFI book, IL will remain the growth engine in H2. The bank is also seeing strong traction in newer segments such as Gold, Micro-Mortgage, and Vehicles. UJSFB has retained its advances growth guidance of 20% for FY26, primarily driven by secured advances growing at ~35%. As the newer products scale up and UJSFB continues to push growth in secured advances in line with its aim to improve its mix to 65-70% over the next five years, we expect UJSFB to deliver a healthy credit growth of ~22% CAGR over FY26-28E.

* NIMs to compress with portfolio shifting towards secured assets: The bank intends to scale up the secured portfolio and expects it to constitute ~65-70% of the portfolio mix over the longer term. This will weigh on yields. However, (i) growth in better-yielding secured segments – Micro-mortgage, Gold, and Vehicle, (ii) faster growth in IL vs. GL, wherein yield differential is ~100 bps, and (iii) gradual downward repricing of deposits driving down CoF with further benefit accruing from the granting of a universal license should enable UJSFB to maintain margins at 7.6-7.8% over FY26-28E.

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