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South KEY CHANGES -based Small Finance Bank : TARGET ….

ESAF Small Finance Bank Ltd. (ESFBL) established in 2016 is a south-centric small finance bank targeting unbanked and underbanked customers, primarily in rural and semi-urban areas. The bank offers micro loans, retail loans, MSME loans, loans to financial institutions, and agricultural loans. ESFBL serves 7.15 million customers through its 700 banking outlets out of which 502 banking outlets are in rural and semi -urban centres , across 21 states and two union territories, as of June 30, 2023.

• Advances under management (AUM) for small finance banks industry saw a 29% CAGR from March 2018 to June 2023, and CRISIL MI&A projects a 22-24% CAGR increase in AUM between June 2023 and March 2025.

• ESFBL's AUM grew from ?8,425.9cr to ?16,331cr, with a 39% CAGR between FY21- 23, the highest among peers according to CRISIL, while deposits rose from ?8,999.4cr to ?14,665.6cr during the same period, with a 27.7% CAGR. As of June 30, 2023, ESAF SFB ranked as the fifth largest SFB in India by AUM, holding a 9% market share.

• Net Interest Income (NII) grew to ?1,529cr at a CAGR of 41% between FY21-23, while net interest margin (NIM) improved to 9.7% in FY23 from 8.5% in FY21.

• The RoA improved from 0.9% to 1.6% over FY21–23, while the RoE improved from 8.7% to 19.4% over the same period, which is impressive within the industry.

• ESFBL recorded a net profit of ?130cr on a total income of ?992cr in Q1FY24, with net interest income rising by 30% to ?585cr. Moreover, the bank saw a significant improvement in asset quality, with gross NPAs decreasing to 1.7% from 6.2% and net NPAs declining to 0.81%.

• At the upper price band of ?60, ESFBL is available at a P/BV of 1.8x (FY23), which appears reasonably priced compared to its peers. The huge market opportunity in the rural segment, increased focus on diversifying their portfolio and expanding their reach, access to low-cost funds, & huge cross-sell opportunities augur well for the small finance banking sector. With consistent growth in loan books and deposits, healthy return ratios, and an increasing pan-India presence, we assign a “Subscribe” rating on a medium- to long-term basis.

Purpose of IPO

The offer comprises fresh shares valued at ?390.7cr and an offer-for-sale for ?72.3cr by the existing shareholders. The proceeds will be utilized towards the augmentation of their Tier-1 capital base, increasing its onward lending business, and ensuring compliance with regulatory requirements on capital adequacy.

Key Risks

• The bank's main operations are in Kerala and Tamil Nadu, accounting for 66% of total advances and 83% of deposits, which is expected to decrease in future.

• As an MFI turned SFB, 75% of their advances (net of provisions) are unsecured; product diversification is likely to reduce this percentage in future.

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