IGI Logo

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.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354