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Strong show yet again

Ujjivan SFB’s sustained strong performance was characterized by 1) brisk loan growth of 27% yoy, 2) robust accretion of granular deposits (improvement in CASA share), 3) stable NIM, 4) firm asset quality (modest credit cost) and 5) robust RoA/RoE of 3.1%/24%. The bank delivered a mild beat on our NII/PPOP/PAT estimates. Commentary from the Management remains sturdy with no change in outlook for balance sheet growth, cost/income ratio and long-term RoE.

Retain BUY with enhanced 12m PT of Rs70

We have largely maintained our FY24-26 estimates wherein slightly higher opex runrate is getting offset by enhanced insurance distribution income. Even with normalized credit cost, much lower bad debts recovery and changing asset mix, we see the bank delivering 20% RoE in a stable operating environment, which would be aided by benefits from moderation in core cost/income ratio. In the context of envisaged growth and RoE, the valuation is undemanding at 7x/1.4x PE/PABV on FY26 basis. The likely completion of reverse merger with the holding company by March would augment BV by Rs2.4-2.5, which is not factored in abovementioned valuation.

Disbursements to pick-up, bank confident of 25% loan growth

Management expects Micro Banking Group Loans disbursements to be substantially higher in Q4 FY24, largely led by new customer acquisition. Due to its Metro and Urban presence, Ujjivan SFB has been much less impacted in Punjab and Haryana where false loan waiver promises impacted delinquencies in certain districts. Growth momentum in other key products of Individual Micro Banking Loans and Affordable Home Loans continues to be strong. Overall, Management sounded confident about delivering 25% loan growth on consistent basis. With a reasonable C/D ratio of 86% and good traction in retail TDs and CASA, loan growth is unlikely to be constrained by the deposits.

NIM has pricing tailwinds and Credit Cost to normalize slowly

NIM stability in Q3 FY24 was underpinned by improvement in portfolio yield, utilization of excess BS liquidity and lower rise in CoD. Portfolio Yield is expected to further improve due to repricing of Micro Banking portfolio (50 bps repricing left for 20% book and full 100 bps repricing left for 17% book) which will happen over next two quarters. TD repricing is largely complete, and there is no pressure on the bank for raising TD rates at this point. Hence, Management expects some improvement in NIM over coming quarters.

Credit cost will continue to normalize and is guided at sub-1% for FY24 and 1.25-1.5% for FY25. Slippages were higher sequentially at Rs1.4bn (2.2% ann. rate) v/s Rs1.13bn. Micro Banking had some impact from higher holidays, false loan waiver announcements in certain districts of North India and floods in TN.

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