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In 1Q25, USFB reported a miss on PAT (at INR 3.0bn, -9% QoQ, -7% YoY, -12% JMFe) on account of contracted margins (NIM at 9.3%, -10bps QoQ) and elevated provisions (credit cost at 1.78% vs 1.31% QoQ) despite moderation in opex (-3.4% QoQ, +23% YoY). Mgmt. expects to maintain NIM at around 9% mark despite increasing share of secured book as the bank undertakes upwards reprising of pending microfinance book and stabilises CoF going ahead. Deposit growth (+22% YoY, 3.3% QoQ) was in-line with USFB’s strategy of building granular, retail focused liability franchise (institutional TD: -9% QoQ). However, AUM growth was muted (+19% YoY, +1% QoQ) due to sluggish disbursements (-21% QoQ, flat YoY) as the bank slowed down its micro group/individual lending (-21%/-23% QoQ) business as a precautionary measure against pockets of stress observed in certain states. Share of secured business increased to 31.2% (vs 30.2% as of 4Q24, and guidance of 35% by FY25). In our view, new leadership is taking the asset mix in the right direction by increasing the contribution of secured assets, which bodes well for the medium term. In addition, management feels that USFB fits the RBI criteria of receiving a universal banking licence and has indicated its willingness to apply for the same. We believe greater thrust on improving efficiency, ability to deliver on improved liability franchise and weathering the environment of increasing credit costs should determine rerating trajectory going ahead. We expect Ujjivan SFB to deliver avg RoA/ RoE of 3.1%/22.6% FY25-26E. Maintain BUY with a TP of INR 65 valuing it at 1.5x FY26E BVPS. 

*  Deposit growth steady; AUM growth muted: In 1Q25, deposit witnessed growth of 22% YoY/3.3% QoQ led by retail TD (+14% QoQ) while CASA growth was flat QoQ resulting in CASA ratio of 25.6% (-90 bps QoQ). Deposit growth was in-line with USFB’s strategy of building granular, retail focused liability franchise (institutional TD: -9% QoQ). AUM growth, on the other hand, was muted (+19% YoY, +1% QoQ) due to sluggish disbursements (-21% QoQ, flat YoY) as the bank slowed down its micro group/individual lending (-21%/-23% QoQ) business as a precautionary measure against pockets of stress observed in certain states. Share of secured business increased to 31.2% (vs 30.2% as of 4Q24) and the mgmt. emphasised on taking this share to 35% by FY25 as the bank scales gold, vehicle and MSME businesses to achieve credit growth guidance of 20% for FY25. 

*  Margin contraction and higher provisions weigh heavy on bottom line:  In 1Q25, USFB reported PAT of INR 3.0bn (-9% QoQ, -7% YoY, -12% JMFe) on account of contracted margins (NIM at 9.3%, -10bps QoQ) and elevated provisions (credit cost at 1.78% vs 1.31% QoQ) despite moderation in opex (-3.4% QoQ, +23% YoY). Mgmt. expects to maintain NIM at around 9% mark despite increasing share of secured book as the bank undertakes upwards reprising of pending microfinance book and stabilises CoF going ahead. Moderation in opex for the quarter (cost to income improved to 55.2% vs 55.7% QoQ) aided the bank in reporting RoA of 2.92% (vs 3.3% QoQ) 

*  Credit cost normalisation underway: Asset quality deteriorated as GNPA/NNPA inched up to 2.52%/0.41% (+28bps/+13bps QoQ) and PCR dropped to 84% (vs 87.5% QoQ). Gross slippage ratio increased to 3.1% (vs 2.2% in 4Q24) and net slippages to 2.3% (vs 1.8% QoQ). Credit cost normalisation continued (at 178bps vs +131bps QoQ) during 1Q25 as PAR increased to 4.2% vs 3.5% QoQ. However mgmt. remained confident of containing credit cost to under 170bps for FY25. 

*   Valuation and view: In our view, new leadership is taking the asset mix in the right direction by increasing the contribution of secured assets, which bodes well for the medium term. In addition, management feels that USFB fits the RBI criteria of receiving a universal banking licence and has indicated its willingness to apply for the same. We believe greater thrust on improving efficiency, ability to deliver on improved liability franchise and weathering the environment of increasing credit costs should determine rerating trajectory going ahead. We expect Ujjivan SFB to deliver avg RoA/RoE of 3.1%/22.6% FY25-26E. Maintain BUY with a TP of INR 65 valuing it at 1.5x FY26E BVPS. 

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