Ujjivan Small Finance Bank - Typical pains of an MFI portfolio - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

Ujjivan Small Finance Bank (USFB) witnessed significant asset quality deterioration in the micro-credit and MSE portfolios (overall GNPA rose by 230bps QoQ). While the overall stressed book (Restructured + PAR > 0) was steady at INR33bn (~22% of loan book), we remain watchful of further deterioration from extended lockdowns in key states, especially in rural and semi-urban locations. With the run-down of provisions during the quarter, we revise our FY22/FY23E earnings estimates downward by 15.9%/11.7% to factor in elevated credit costs and lower disbursals. Maintain ADD with a revised TP of INR 37 and BUY on Ujjivan Financial Services with a TP of INR 354.

Muted operating performance, disbursals gain traction: USFB reported muted P&L performance with NII/PPOP decline of 21%/17% YoY, significantly lower than our estimates, driven primarily by high interest income reversals. NIM declined sequentially by 300bps despite increasing traction on deposits and funding cost tailwinds (30bps QoQ). Disbursements gained traction during the quarter (+31%/96% YoY/QoQ) driven by non-MFI segment (~28% of loan book).

Stress surges, micro environment becoming less conducive: UFSB's GNPA witnessed significant surge (7.1% vs pro-forma 4.8% in Q3FY21) with visible stress in the MFI (PAR>0 at 16%) and MSE portfolio (PAR>0 at 23%). Write-offs during the quarter were very low (~2% annualised), alongside no fresh restructuring in the MFI portfolio. Collection efficiency, which had witnessed improvement in Mar'21 (94%), has dropped to 89% in Apr'21 due to the pandemic and is expected to significantly impact delinquencies and recoveries in Q1FY22 as well.

Lower provisions in Q4 raises credit cost estimates for FY22: USFB made no provisions for its stressed portfolio during the quarter despite high slippages, utilizing its COVID buffer instead. With PCR at ~60%, COVID buffer at ~1% of loan book and severity of the second wave of pandemic on economic activity, we expect credit costs in FY22 to remain elevated and increase our average provisions estimates for FY22-FY23E to 3.2% from 2.7%.

Source : Equity Bulls

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