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Ujjivan reported a PAT miss at Rs 1bn (0.9% RoA), mainly due to a sharp decline in margins and elevated provisions, partly offset by higher treasury gains. AUM growth remains soft (10.7% YoY/3.6% QoQ), dragged by the MFI segment, while the bank continues to accelerate growth in secured lending, including housing loans. However, lower yields on secured loans, sticky funding cost, excess balance sheet liquidity, and a policy change to refund interest on MFI customer prepayments led to a sharp 60bps QoQ decline in NIM to 7.7%. Going forward, the bank expects NIM to remain range-bound at 7.8-7.9%. Though incremental stress in most states including Karnataka is easing, GNPA ratio inched up 30bps QoQ to 2.5% (still less than 3% threshold needed for a Universal Banking license). We believe Ujjivan could be a strong beneficiary of MFI recovery, thereby improving its RoA trajectory from 1.4% in FY26E to 2.2% in FY28E. Additionally, the bank is a potential candidate for the Universal Banking license, which should be both capital and RoA-positive. Thus, retain BUY with an unchanged TP of Rs60, rolling forward on 1.5x Jun-27EABV.

Slower growth, sharp margin compression

Ujjivan SFB reported soft AUM growth of 10.7% YoY/3.6% QoQ. After several quarters of sequential decline, the MFI portfolio reported flat growth (down 11.8% YoY) in Q1. However, the secured segments such as retail (+61.8% YoY) and MSME (+59.2% YoY) continue to deliver strong growth, increasing its share in the overall book to 46% vs 44% in Q4. Within retail, the bank has been aggressively growing its home loan portfolio, leading to softer yields. In Q1, NIM compressed by 56bps QoQ to 7.7%, mainly led by a change in the asset mix (25bps), excess liquidity (17bps), and refund of prepayment interest (14bps). Though the one-off impact will wane off, structural portfolio shifts toward secured loans and the rate cut cycle could keep NIMs range-bound at 7.8-7.9%.

MFI stress largely peaked; recovery expected in H2

Continued stress in MFI due to MFIN guardrails and the impact of recent ordinances in Karnataka and TN led to higher slippages at Rs3.5bn/4.2% of loans (80% from MFI). This along with no sale of NPAs to ARC led to a 30bps QoQ rise in GNPA ratio to 2.5% (still below the 3% threshold required for a Universal Banking license). The management indicated that MFI slippages have peaked in nine of the top 10 states in Q4 while KTK peaked in Q1FY26. The PAR pool rose to 4.8% (vs 4.5% QoQ), albeit the pace of accretion has moderated in the past two quarters. The management indicated that credit costs may remain elevated in Q2 but should gradually taper down in H2.

We retain BUY on Ujjivan SFB

Factoring in margin compression and elevated provisions, we cut earnings estimates but retain BUY with an unchanged TP at Rs60 (1.5x Jun-27E ABV). Key risks: Macro as well as micro disruption leading to slower-than-expected growth and higher NPAs; KMP attrition.

Key concall takeaways

Outlook on loans, deposits, and NIM

• Customer graduation gained momentum, with 34,000 GL customers transitioning to individual loans, and a significant number migrating to secured products.
• NIM is expected to moderate, going forward. Deposit repricing will ease the cost of funds in the coming quarters. The bank is also carrying excess liquidity, which is expected to normalize by Q2.
• Yield decline is primarily attributed to a shift in loan mix toward secured products. Further, cost of funds is projected to decline by ~30bps in H2FY26, supported by a 65bps reduction in top-tier TD rates and selective recalibration of SA rates (cut by up to 100bps), post-Mar 2025.
• NIM contracted by 56bps QoQ, driven by asset mix change of 25bps, excess liquidity of 17bps (expected to be absorbed in Q2/Q3) and refund of prepayment interest of 14bps NIM is guided to settle around 7.9% in Q2/Q3 and 7.8% by Q4 as these one-offs normalize.
• Further, 14bps prepayment is related to MFI segment where repayments are scheduled monthly and aligned with specific center meeting days. Some customers tend to pay one or two days in advance. Under the microfinance accounting framework, any interest corresponding to these early payments must be adjusted in the customer’s favor. The bank has undertaken this exercise, and the resulting amount has been credited back to customers. This adjustment is recorded as an interest reversal before the actual realization, which is why it reflects accordingly in the financials.
• Group loan yields are lower than individual loans yields, which are ~100bps higher.
• Bulk term deposit yield at ~7.69% has an average tenure of one year. Retail TD yield on average is ~8.09%, though rates are gradually trending down. Retail TD rates are around 7.6%.
• The bank is carrying excess liquidity buffer of Rs11bn to meet the huge liabilities (maturities) in Q2, which will get absorbed in this quarter, leading to liquidity stabilization.
• Ujjivan continues to maintain competitive pricing; the sanction-to-disbursement ratio stands at 90%, higher than the industry average.

Asset quality

• The Micro Banking Bucket-X CE stood at 99.34%, with the management expecting it to rise above 99.5% by Q3. Fresh PAR improved in Q1 as X-bucket collections improved while in Q4, the deterioration was primarily limited to the April period and improved May onwards.
• PAR accretion has moderated for the past two quarters. Slippages in the micro-banking segment peaked in nine of the top 10 states in Q4; Karnataka peaked in Q1FY26.
• The absence of ARC deals in Q1 (compared to Q4) led to higher reported PAR/GNPA figures. Q4 ARC deals helped reduce GNPA; of this, IL forms 22% and GL forms 78% of the ARC portfolios.
• The micro-mortgage portfolio is now 24 MOB, with ~80% of the book built in the last 15 MOB. While the portfolio may see a slight uptick in PAR and GNPA as the book matures, QoQ NPA has remained negligible so far. This is a high-yielding portfolio that complements the sub-Rs 1mn housing segment.
• IL book stands at Rs53bn, with Karnataka accounting for 10% of it. PAR in Karnataka rose from 6.8% to 7.4%.
• In Tamil Nadu, GL performance remains weak due to industry-wide over-leveraging, leading to elevated PAR and NPA. However, IL continues to perform better, with GNPA below 2% and PAR in the 3–4% range. 
• One of the reasons for the drop in collection efficiency is the decline in the Ujjivan Plus 3+ customer base from 14% last year to ~7.4% now. As good customers complete their loans, the remaining portfolio is largely delinquent, impacting collection metrics. The bank expects this pool to become largely insignificant over the next quarter or in 4–5 months, as the rundown continues.
• The SMA book has steadily declined from 2.68% to 2.36%, and now to 2.29%, indicating that slippages are likely to be significantly lower in the coming quarters compared to the previous two.
• Further, Karnataka is showing clear signs of improvement, with stress seen in January easing significantly. Bengaluru Metro, where a large part of the portfolio lies, was never impacted and continues to perform well, with portfolio quality better than industry averages. While some stress remains in districts like Belgaum, Raichur, Tumkur, and Ramanagara (10% of the state portfolio), the overall state performance is strong. With the ordinance issue subsiding and demand improving, the bank expects continued recovery. The IL book, which forms 24% of the portfolio in the state, is performing significantly better than GL, supported by stronger customer profiles.
• Microfinance accounts for about 80% of total slippage, with ~Rs3bn coming from the micro-banking segment, including both group and individual loans. Of the remaining slippages, housing contributed ~Rs 250mn, MSME ~Rs200mn, and vehicle finance ~Rs50mn.
• Credit cost is expected to remain elevated for the next couple of quarters due to provisioning for legacy stock. It should taper in H2. Steady-state credit cost will be ~2.2– 2.5% in unsecured and ~0.7–0.8% in secured.
• The increase in manpower is helping in two key areas—SMA and NPA collections, including recoveries from write-offs. Most of the off-roll team is focused on early buckets (31-90 days), leading to improved efficiency in SMA-1 collections, which rose from ~36- 37% to 47-48%, and SMA-2, which rose from 42% to 45%. This focus has contributed to reduced slippages, with further improvement is expected. NPA collections, especially in micro-banking, take longer due to multiple follow-ups, but Q1 has already shown better recovery than Q4.

Other highlights

• The bank added 101k new customers in the quarter.
• Gold loan is now present at 280 branches.
• The bank plans to open 25 new branches in FY26, aiming to reach 400 branches in the next four years.
• FY26 guidance
• Advances growth of ~20%, with secured book expected to grow by ~35%
• Deposit growth of~18% and CD ratio of ~88%
• Cost-to-income ratio would be ~67%
• Credit cost: ~2.3-2.4% of average gross advances
• ROE: 12-14% and ROA: 1.2-1.4%

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