Maintain ADD on Ujjivan Small Finance Bank and Ujjivan Financial Services - Gradual improvement visible - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

USFB's 2Q earnings were significantly ahead of estimates due to higher-than- expected other income and lower-than-expected provisions. The bank's collection efficiency, like its peers', sharply improved. Further, traction in granular deposits and operating efficiency were creditable. Sustainability of performance, though, will be key. We maintain ADD on USFB (target price of Rs 42) and UJJIVAN (target price of Rs 374). We will watch out for corporate actions related to regulatory compliance (for more, refer to our recent IC).

Asset quality and collection efficiency trends: Adjusted for the recent SC order, GNPAs were 1.2% (+40/20bps YoY/QoQ). Collection efficiency significantly improved, although it varied across segments-88% in October (93% including overdue), microfinance (88%), FIG (100%), MSE (86%), housing (93%), personal loans (88%) and vehicle loans (91%). In the microfinance portfolio, the bank reported lower than average collection efficiency in WB (78%), MH (79%), AS (74%), and PB (83%). Despite this sharp improvement in collection efficiency, we continue to conservatively build in a significant rise in GNPAs in FY21E (4.8%).

Provisions dipped 28.4% QoQ to Rs 1bn, but remained elevated YoY (~4x), and were almost entirely COVID-19 related. The total stock of COVID- related provisions is at ~Rs 3bn (2.2% of loans and 3.4% of microloans, BANDHAN- 2.3% of loans and 3.5% of microloans, CREDAG- total provisions at 5.4% of AUM). The management intends to continue providing for the COVID impact prudently. We have slightly increased our LLP estimates to 2.8% over FY21-23E.

Overall deposit growth was muted at 6.1% (-2.8% QoQ); this appears to be due to the bank's conscious strategy to reduce the proportion of bulk deposits. Retail TDs and FDs grew 25.3/4.6% while CASA deposits grew 47.2/12.8% and they now constitute 16.5% of deposits (+460/229bps).

USFB sustained some of the oplev gains made in 1Q, as operating expenditure was 6% lower YoY (+11.2% QoQ). Consequently, the C-I ratio was 1290bps lower YoY at 56.6% (+68bps QoQ).

Source : Equity Bulls

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