Capital Small Finance Bank

Business concentrated in Punjab

SFB with granular loan book and lowest deposit rates caters to middle income group segment from rural and semi-urban areas

Capital Small Finance Bank was first small finance bank (SFB) in India to commence operations on 24 April 2016 pursuant to RBI’s approval dated 4 March 2016. It was one out of the ten entities to receive the SFB license in 2015. The bank has a long understanding of needs of target customers with the background as a local area bank since incorporation in 1999.

Headquartered in Jalandhar, the bank operates in five states of Punjab, Haryana, Delhi, Rajasthan, Himachal Pradesh and Union Territory of Chandigarh. The bank has 173 branches and 175 ATMs with 76.30% of branches and 75.75% of total customers are located in rural and semi-urban areas. The bank had 7,25,037 customers (both credit and deposit) end September 2023.

The bank offers a range of banking products on the asset and liability side. Asset products primarily include agriculture loans, MSME and trading loans (working capital, machinery loans etc.) and mortgages (housing loans and loans against property).

The bank focuses primarily on the middle-income customer segments in semi-urban and rural areas with 41.62% of branches in rural areas, 34.68% branches in semi-urban areas and 23.70% of branches in urban areas end September 2023.

The diversified loan portfolio of the bank across multiple asset classes has expanded 13% yoy to Rs 8565.94 crore end September 2023. Almost entire loan book is secured at 99.85% with 84.26% secured by immovable properties. The focus on granular loan book has led to rise in the share of loans with ticket size of up to Rs 25 lakh to 67.44% end September 2023.

The bank offers comprehensive suite of products of savings bank deposits, current deposits, term deposits, NRE and NRO deposits and tax saver deposits. The deposits book of the bank has increased 13% yoy to Rs 7000.29 crore end September 2023.

The bank had consistent asset quality in the range of 2-3% for last 3 and half years. The GNPA ratio was steady at 2.73% and NNPA ratio at 1.36% end September 2023.

The bank generate fee income from products and services such as forex and money transfer, outward remittances, safe-deposit lockers, distribution of life insurance and general insurance products, 3-in-1 demat and trading account and other ancillary services.

The cost of funds was one of the lowest at 5.11% for FY2023 and 5.68% for H1FY2024. The bank is the lowest interest paying SFB. The highest retail term deposit rate is only 7.60%, while saving bank deposit rate is flat 3.50%.

The bank also ensures to maintain adequate capital with CRAR of 20.72% and Tier I capital ratio of 15.26%. Risk weighted asset stood at Rs 4522.91 crore end September 2023.

The bank has leveraged technological capabilities to increase the scale of digital interactions and digital transactions with customers. The digital transactions share in non-cash transactions increased from 54.48% in FY2021 to 84.03% in H1FY2024.

Sarvjit Singh Samra, is the promoter and MD&CEO of the bank with over three decades of experience in the banking and financial services sector. The bank is also backed by a number of institutional investors and financial institutions including SIDBI, PI Ventures LLP, OIJIF II, Amicus, ICICI Prudential, HDFC Life and Max Life Insurance Company etc.

The Offer and the Objects

The initial public offer (IPO) consists of fresh issue of Rs 450 crore through issuance of 1.01 crore equity shares at the lower band of Rs 445 per share (face value Rs 10 per share) and 0.96 crore shares at the upper band of Rs 468 per share. The issue also consists of offer-for-sale (OFS) of 0.16 crore equity shares to raise Rs 69.48-73.07 crore.

None of the promoter and promoter group entities is participating in the OFS. The promoter shareholding would decline to 18.8% post IPO from 24.0% pre-IPO.

The issue is to be made through the book-building process and will open on 07 February 2024 and will close on 09 February 2024.

The bank proposes to utilize the net proceeds from the offer towards augmenting Bank’s Tier I capital base to meet future capital requirements. The listing of the bank is also in line with the terms of the RBI SFB licensing guidelines, requiring the bank to list its Equity Shares on the stock exchanges within three years from reaching network of Rs 500 crore.

Strengths

The experience of operating as a local area bank for over 16 years has provided a competitive edge in creating a retail centric deposit franchise with a high share of retail deposits at 93.59% and CASA deposits at 37.76% end September 2023. The retail deposits have significant advantages including stability in deposit, greater customer retention, enhanced cross-selling opportunities in addition to supporting the low cost of funds.

The bank has a well-diversified portfolio across products – agricultural (38.65% of loan book), MSME and trading (19.66%), mortgage lending (26.06%) and other products (15.63%) which helps to mitigate risk and optimise resources.

The bank has consciously focused on building a secured and granular loan book over the years. The share secured loan book stands at 99.85% and ticket size up to Rs 25 lakh at 67.44% end September 2023.

Streamlined credit assessment processes and risk management practices enables the bank to maintain good asset quality and low delinquencies. Strategy of secured lending, primarily for productive purposes and conservative loan to value ratio contributes towards lower delinquencies and credit losses.

The Bank is maintaining a healthy provisions coverage ratio of 68.64% end September 2023.

Weaknesses

The business is concentrated in North India, with approximately 86.13% of total branches or 149 out of a total of 173 branches are located in Punjab.

Punjab also contributes 83.97% of advances and 93.73% of deposits. Further within Punjab, Jalandhar district contributes 36.9% of branches, 37.5% of advances and 53.2% of deposits.

Any adverse development in Punjab could have an adverse effect on business.

The business is significantly dependent on banking operations in rural and semi-urban areas accounting for 70.85% for advance clients, 59.48% of advances and 76.48% of deposits and any adverse developments in these areas could adversely affect business.

The bank utilizes the services of third parties for operations. Any deficiency or interruption in their services could adversely affect business and reputation.

Valuations

EPS on post-issue equity for TTM ended September 2023 works out to Rs 23.7. At the price band of Rs 445 to Rs 468, P/E works out to 18.7-19.7x of EPS for TTM ended September 2023. The bank has conducted a pre-IPO placement of 10.577 lakh equity shares on 17 June 2023 to Max Life Insurance Company at an issue price of Rs 468 each aggregating to Rs 49.50 crore.

Post-issue, the book value (BV) will be Rs 258.1, while adjusted BV (ABV) net of net non-performing assets and 10% of restructured loans works out to Rs 238.7 per share at upper price band.

The scrip is being offered at a price to Adj BV multiple of 2.0x at the upper price band.

Among peers, AU SFB is trading at P/ Adj BV multiple of 4.4x, Ujjivan SFB 2.6x, Equitas SFB 2.3x, Utkarsh SFB 2.2x, ESAF SFB 1.7x and Suryoday SFB 1.1x.

In terms of PE, AU SFB is trading at 31.1x, Equitas SFB 15.9x, Utkarsh SFB 12.9x, Suryoday SFB 11.3x, Ujjivan SFB 9.3x and ESAF SFB 9.1x.

Capital SFB has posted moderate and lowest loan growth of 13.0% end September 2023. Among peers, the loan growth of Equitas SFB was strong at 37.1%, ESAF SFB 37.0%, Suryoday SFB 28.7%, Ujjivan SFB 26.9%, Utkarsh SFB 26.4% and AU SFB 24.0%.

Capital SFB has relatively high GNPA ratio at 2.7% end September 2023, while NNPA ratio was at 1.4%. Among peers, NNPA ratio of Ujjivan SFB was at 0.1%, Utkarsh SFB 0.2%, AU SFB 0.6%, Equitas SFB 1.0%, ESAF SFB 1.2% and Suryoday SFB 1.5%.

RoA of Capital SFB was relatively low at 1.3% for TTM ended September 2023 compared with Ujjivan SFB at 3.2%, Utkarsh SFB 2.3%, Equitas SFB 1.9%, ESAF SFB 1.8%, AU SFB 1.7% and Suryoday SFB 1.4%.

Capital SFB has recorded RoE of 15.0% for TTM ended September 2023 as compared to Ujjivan SFB at 27.8%, ESAF SFB 17.2%, Utkarsh SFB 16.7%, AU SFB 13.7% and Equitas SFB 13.7%.