At a time when NBFC stocks are going through a rough phase, UBS estimates over the next 3-4 years, small finance banks (SFBs) can grow their loan books and revenues at a pace more than twice the industry average.
SFBs can grow revenues and market share given the strength of their distribution networks in underpenetrated credit segments and likely market share gain from non-banking financial companies (NBFCs), said the note.
Asset Under Management (AUM) for AU Small Finance Bank, Equitas Holdings and Ujjivan Financial Services grew 47 percent YoY in FY19, supported by market share gains from NBFCs, presence in under-banked segments and scale-up of new product initiatives.
With access to retail and wholesale deposits, UBS expects market share gains to continue and sees AUM of the three SFBs to rise at a 33 percent CAGR over FY19-22E to Rs 1.1 lakh crore.
Equitas and Ujjivan have been re-rated sharply over the last six months due to strong market share gains, but the valuations are at a discount to peers with similar growth/ROE.
UBS has raised target price on AU Bank from Rs 700 to Rs 760; for Equitas, it has raised target price to Rs 190 from Rs 160 earlier; and for Ujjivan Financial Services, target price has been raised to Rs 450 from Rs 340 earlier.
Equitas is the top pick of UBS among the SFB space. UBS factors in a 40 percent holding company discount on Equitas Holdings. That implies Equitas is trading at 2.1x FY20E P/BV.
UBS believes that the stock could re-rate to 2.5x FY20E P/BV given strong growth. Equitas guides for 15 percent growth in opex.
For AU Bank and Ujjivan, UBS factors in 23-28 percent opex growth in FY20. Equitas appears adequately capitalised, but the global investment bank factors in 10 percent equity dilution for Ujjivan in FY20 given strong growth potential.
UBS raised FY20E/21E EPS for Equitas by 1.5/2.5 percent. For AU Bank, the global investment bank trimmed FY20E EPS by 3 percent. For Ujjivan, UBS raised its profit estimates but cut FY20E/21E EPS by 5/2 percent.
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