Buy Ujjivan Small Finance Bank; target of Rs 40: YES Securities

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YES Securities' research report on Ujjivan Small Finance Bank

Ujjivan Small Finance Bank (USFB) delivered a large beat on earnings in Q2 FY21 led by a stronger NII performance, higher non-interest income, controlled opex growth and lower-than-estimated provisioning. Sequential decline in gross advances at 3.4% (yoy growth decelerated sharply to 8%) was caused by 6% contraction of Micro Banking portfolio (share declined to 76%) where the bank has been cautious on disbursements and has tightened credit policy. Qoq growth in affordable housing and MSE lending portfolios was strong at 5.5-6%. Deposit base also declined by 3% qoq with steep reduction in institutional deposits (CD + Wholesale TDs) with the bank substituting them with Retail TD and CASA (their combined contribution rising to 49%). This mix change along with the reduction in FD rates reflected positively in deposit cost and NII growth. USFB augmented its Covid provisioning buffer by Rs1bn in Q2 FY21 (cumulative at 2.2% of loan book) even as it witnessed a significant improvement in collection efficiency in Micro Banking and other portfolios during recent months. October collection efficiency in Micro Banking portfolio was at 88% without arrears, pre-closures and advance payments and 91% of borrowers have started repaying. Collection efficiency is relatively lower in the states of WB, MH, Assam and Punjab. Though confident about collections improving further in ensuing months, Management refrained from guiding on credit cost while being open for more provisions if required. On sustainability of the cost/income ratio delivered in H1 FY21, the bank believes that a significant portion of the reduction (v/s pre-Covid) is structural.

Outlook

We factor conservative 5.5% loan loss in Micro Banking and 3% loan loss in other portfolios (bulk credit cost in FY21) to capture sustained uncertainty around Covid. In spite of this, we estimate USFB to deliver reasonable RoA in current fiscal and a sharp improvement next year. Structural improvement in cost/income ratio will alleviate credit cost impact on RoA. USFB is trading at 1.6x FY22 P/BV. Rate BUY with 12m PT of Rs40.

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