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|Tuesday, 16 March 2021||
Complying with listing norms
Well capitalized and fast growing with lowest cost to income ratio, but liabilities profile is weak and microfinance loans share is high
Suryoday Small Finance Bank is among the leading Small Finance Bank (SFBs) in India in terms of net interest margins, return on assets, yields and deposit growth and had the lowest cost-to-income ratio among SFBs in India in FY2020. It has been serving customers in the unbanked and underbanked segments in India and promoting financial inclusion for over a decade, operating as a Non-Banking Finance Company prior to converting to SFB. The company started operations as an SFB on 23 January 2017 and it was included in the second schedule to the RBI Act on 24 July 2017. Over the years, the bank has diversified its loan portfolio to include non-micro banking loans thereby reducing dependence on micro banking business.
The bank commenced microfinance operations in 2009 and has since expanded operations across 13 states and union territories, customer base to 1.44 million, employee base to 4,770 employees and distribution reach to 554 Banking Outlets including 153 Unbanked Rural Centres (URCs) end December 2020. The bank has set up 661 customer service points (CSPs) as additional service or touch points during April 2020 to January 2021 and intend to continue to expand reach through the CSP model. The delivery platform also includes partnering with business correspondents (BCs), arrangements with various payment banks, ATMs, phone banking, mobile banking, tablet banking, unified payment interface and internet banking services.
The bank is focused on urban and semi-urban locations with greater income earning capabilities and employment opportunities compared with rural regions. The metropolitan region contributed 37.13% of Gross Advances, urban 27.78% and semi-urban areas 28.83%.
The bank currently offers a variety of asset and liability products and services designed for inclusive finance and general banking customers. The asset products consist of an inclusive finance portfolio (comprising loans to JLG customers), commercial vehicle loans, affordable housing loans, micro business loans, unsecured micro and small enterprise and small and medium enterprise loans, secured business loans, financial intermediary group loans and other loans. The Gross Loan Portfolio of the bank has grown at a CAGR of 47% from Rs 1717.78 crore end March 2018 to Rs 3710.84 crore end March 2020 and rose to Rs 3908.23 crore end December 2020.
On the liability side, products comprise current accounts, savings accounts, salary savings accounts and a variety of deposit accounts including recurring deposits and fixed deposits that the bank source from customers across India. The deposits book has grown at a CAGR of 95% from Rs 749.52 crore end March 2018 to Rs 2848.72 crore end March 2020 and further galloped to Rs 3343.84 crore end December 2020. The retail deposits comprised 72.40% of total deposits and CASA ratio stood at 13.32% end December 2020.
In addition to loan and deposit products, the bank also offers other banking facilities, products, and services to generate non-interest income and cater towards the additional needs of customers. These facilities, products and services include debit cards, internet banking, mobile banking, online bill payment services and the distribution of third-party life and general insurance products and mutual fund products.
The bank has leveraged the use of technology across all aspects of operations including customer acquisition and customer lifecycle management. The tablets are used by staff to service customers in the unbanked and underbanked segments which the bank believes has led to greater customer convenience and improved operational efficiency. The bank also has a robust back-end operating system supported by the core banking system and document management system.
The bank is led by founder and MD and CEO Baskar Babu Ramachandran with several years of experience in the financial services sector. The bank has been backed by investors since inception including development finance institutions such as IFC and DEG, private equity investors such as Gaja Capital India AIF Trust, Gaja Capital Fund II, TVS Entities, ASK Pravi Private Equity Opportunities Fund and Lok Capital Growth Fund and institutional investors including HDFC Holdings, HDFC Life Insurance Company, IDFC FIRST Bank and Kotak Mahindra Life Insurance Company.
The CRAR of the bank stood at 41.17% with Tier I capital of 36.94% at the end December 2020 and was the highest among all SFBs in India as of March 2020.
Gross NPAs were Rs 29.91 crore or 0.78 % of gross advances and net NPAs were Rs 12.81 crore or 0.33 % of net advances.
Going forward, the bank intends to strengthen its relationship with existing customers by leveraging inclusive finance customer base and by offering other asset and liability products based on their requirements. The focus will be to grow the customer base by providing quality customer service. The bank will continue to focus on the use of technology, explore partnerships with fintech companies, undertake data analytics to better understand the requirements of customers, improve operational efficiency and further reduce costs. As the bank grows operations, the bank will look to selectively expand its network of Banking Outlets across newer geographies and penetrate further into existing markets. The bank also intends to engage with BC partners and payment banks to leverage their network to expand and increase market share.
The Offer and the Objects
The initial public offer (IPO) consists of fresh issue of 81.50 lakh equity shares aggregating up to Rs 245.45 crore at the lower band of Rs 303 per share (face value Rs 10 per share) and Rs 247.08 crore at the upper band of Rs 305 per share.
Further, the IPO also comprises of offer of sale of 109.43 lakh equity shares aggregating up to Rs 331.58 crore at lower price band and Rs 333.76 crore at upper price band.
An offer for sale of comprises of 4,387,888 equity shares by International Finance Corporation, 2,021,952 equity shares Gaja Capital Fund II, 1,889,845 equity shares by DWM (International) Mauritius, 750,000 equity shares by HDFC Holdings, 1,500,000 equity shares by IDFC First Bank, 100,000 equity shares by AMERICORP Ventures, 186,966 equity shares by Kotak Mahindra Life Insurance Company and 106,419 equity shares by Gaja Capital India AIF Trust.
The issue includes a reservation of 500,000 equity shares for subscription by eligible employees with the discount of Rs 30 per share.
The issue is to be made through the book-building process and will open on 17 March 2021 and will close on 19 March 2021.
Bank proposes to utilize the Net Proceeds from the offer towards augmenting Banks Tier I capital base to meet future capital requirements. The listing of the bank is also in line with terms of the RBI in-principle approval, RBI final approval and SFB licensing guidelines, requiring the bank to list its Equity Shares on the stock exchanges within three years from the date of commencement of business.
The bank is customer centric evident from strong growth in the customers base to 1.44 million end December 2020 with the focus on unbanked and underbanked customers. The priority sector loan book of the bank is sharply higher at 114.09% of ANBC against the regulatory requirement of 75% for SFB. The customer retention ratio has been strong at 79.5% for FY2020 and 87.4 % in FY2020. The bank has a 24/7 callcenters, Smile Centers, to resolve customer queries and actively gathers feedback to further improve services.
The bank has been able to diversify its product portfolio to ensure that the proportion of net unsecured portfolio has reduced from 94.8% of net advances in FY2018 to 74.6% in 9MFY2021. The bank has been able to diversify into other products, which broadly include commercial vehicle loans (9.4%), affordable home loans (6.3%), micro business loans (1.0%), secured and unsecured business loans to MSME/SME (4.6%)and corporate and financial intermediary group loans (3.5%). The bank has over the years grown secured net advances from 5.2% end March 2018 to 25.4% end December 2020.
The bank has witnessed rapid growth in deposits from Rs 749.52 crore end March 2018 to Rs 3343.84 crore end December 2020. The bank is among the SFBs with the highest deposit growth rate in FY2020. The retail deposit base has surged more than five times from Rs 308.89 crore end March 2018 to Rs 2421.07 crore end December 2020 with retail deposits ratio rising to 72.40%. The bank has substantially reduced cost of funds from 10.71% in FY2018 to 8.55% in FY2020 and further down to 8.05% (annualized) in 9MFY2021.
The bank extensively uses digital technologies for the entire customer lifecycle. It continues to invest in digital technologies to drive greater customer experience and employee empowerment. In addition, the bank has made investments to strengthen security infrastructure given the paramount importance of information security.
The bank has a strong credit function that comprises a team of 83 individuals as of 31 December 2020. The bank has implemented credit management models, while credit underwriting practices include scorecard-based assessment. Its use of data analytics has played a significant role in various business decisions particularly in the inclusive finance customer segment. The bank has an established risk management framework to identify, assess, monitor, and manage risk.
The bank has maintained a higher capital adequacy ratio 41.17% end December 2020 against the stipulated regulatory requirement of 15.00% and was the highest amongst SFBs in India at the end March 2020.
The asset quality is stable with GNPA at 0.78% NNPA at 0.33% and provision coverage ratio (including technical write-offs) at 89.58% at the end December 2020. The certificate of deposit program has the highest rating of A1+ by CRISIL and ICRA and non-convertible debentures and subordinated debt programs have both been rated A (Stable) by ICRA.
The bank has a healthy track record of strong financial performance and cost-efficient operations. The net profit of the bank has increased from Rs 11.49 crore in FY2018 to Rs 111.2 crore in FY2020 and stood at Rs 54.87 crore in 9MFY2021. The return on average assets has improved from 0.67% in FY2018 to 2.53% in FY2020 and stood at 1.24% (annualized) for 9MFY2021. Return on average equity improved from 2.25% in FY2018 to 11.27% in FY2020 and stood at 6.32% (annualized) 9MFY2021.
The cost-to-income ratio of the bank is lowest among SFBs in India, which has reduced from 64.44% in FY2018 to 47.05% in FY2020 and was 55.39% in 9MFY2021. The relatively moderate size of Banking Outlets has led to reduction in the overall capital expenditure and operating expenditure per Banking Outlet. The cost-efficient operations are attributable to automation and digitization of various processes including loan sourcing in inclusive finance business.
The bank has multiple distribution channels comprising banking outlets, ATMs, phone banking, mobile banking, tablet banking, CSPs and internet banking services. As of 31 December 2020, the bank operated 554 banking outlets including 153 URCs across 13 states and union territories. The bank also undertakes a part of operations through BCs and the bank has 16 BC outlets.
The continuing impacts of COVID-19 are highly unpredictable and could be significant, and may have an adverse effect on collection efficiencies, disbursements and potential NPAs.
The microfinance advances of the bank remained higher at 70.4% of total Gross Loan Portfolio as end December 2020 and any adverse developments in the microfinance sector including any regulatory changes could adversely affect business. The microfinance in small traders and others belonging to the unorganized sector are most impacted due to the economic downturns.
Banks in India are subject to stringent regulatory requirements and prudential norms and inability to comply with such laws, regulations and norms may have an adverse effect on business, results of operations, financial condition, and cash flows.
Certain requirements that are applicable to SFBs in terms of the SFB Operating Guidelines and other banking laws and regulations are more stringent in comparison to scheduled commercial banks and non-banking financial companies and have and will continue to impact business and operations.
The bank has a limited operating history as an SFB and future financial and operational performance cannot be evaluated on account of evolving and growing scale of operations
The bank relies extensively on and upgrades information technology systems and any disruptions in such systems, or breach of data, could adversely affect operations and reputation. Further, success depends on ability to respond to new technological advances.
Out of 554 banking outlets, 338 banking outlets are in three states, with Maharashtra accounting for 34.8% of loans, Tamil Nadu for 27.4% and Odisha for 15.1% and any adverse changes in the conditions affecting these regions can adversely impact business.
Deposits from 20 largest depositors represented 59.2% for total deposits end March 2020 and remain higher at 29.8% at the end December 2020 and a loss of such customers could materially and adversely affect deposit portfolios.
The bank has issued Equity Shares at a price that may be lower than the issue price in the last 12 months.
Majority of advances are unsecured. Inclusive finance (JLG) loan portfolio, unsecured overdraft facilities, micro business loans and unsecured MSME/ SME loan portfolio are not supported by any collateral, which account for 74.6% of net advances. In the event of non-payment by a borrower of one of these loans, the bank may not be able to recover unpaid amounts in a timely manner or at all
The Indian banking industry is competitive and growth strategy depends on ability to compete effectively. The top three SFBs accounted for 63% of the total SFB AUM in FY2020 compared to 55% in FY2017. AUM accounted for 4% of the overall AUM of SFBs in FY2020. Further, the RBI issued Guidelines for On-Tap Licensing of SFBs in the Private Sector on December 5, 2019, which permits applicants to apply for SFB license to the RBI at any time, subject to fulfillment of certain eligibility criteria and other conditions and this will increase competition within small finance banks operating in India.
The CASA ratio of the bank is low at 13.32% and inability to grow CASA deposits and CASA ratio may result in a high cost of deposits.
The Supreme Court has directed banks that accounts that were not declared NPA till 31 August 2020 shall not be declared NPA till further orders. However, if the bank had classified borrower accounts as NPA after 31 August, 2020, its GNPA ratio would have been 9.28% NNPA ratio at 5.38%, on a proforma basis end December 2020.
The annualized EPS on post-issue equity works out to Rs 6.9 for 9MFY2021. At the price band of Rs 303 to Rs 305, P/E works out to 44.0 to 44.2 times of 9MFY2021 EPS.
Post-issue, the book value (BV) will be Rs 155.8, while adjusted BV (ABV) net of proforma net non-performing assets works out to Rs 136.1 per share at upper price band.
The scrip is being offered at price to Adj BV multiple of 2.2 times at the upper price band.
Among peers, AU Small Finance Bank is trading at P/ Adj BV multiple of 7.4 times, while Ujjivan Small Finance Bank is trading at P/ Adj BV multiple of 2.3 times and recently listed Equitas Small Finance Bank is trading at P/ Adj BV multiple of 2.4 times.
In terms of PE, Equitas Small Finance Bank is trading at 18.6 times and AU Small Finance Bank is trading at 27.3 times its annualised EPS for 9MFY2021.
The bank exposure to microfinance segment is higher at over 70% of loan book end December 2020. Among peers, Ujjivan Small Finance Bank too has exposure to microfinance at 73.2%, but Equitas and AU Small Finance Banks have more diversified loan books.
As per the guidelines, the promoter in SFBs are required to reduce their shareholding to 40% within a period of five years from the date of commencement of SFB operations and further to 30% within a period of 10 years and to 26% in 12 years. Suryoday Small Finance Bank does not have the Holdco-sub structure, unlike to some of the other SFBs. Also, the post issue promoter holding declines to 28% avoiding any requirement for further promoter dilution. The promoter share holding in the AU Small Finance Bank is also below 30%, but promoters shareholding in Ujjivan and Equitas Small Finance Bank is above 80%.
The proforma net NPAs of Suryoday Small Finance Bank is sharply higher at 5.4% end December 2020 due to high exposure to microfinance and commercial vehicle loans segments compared with 1.3% for AU Small Finance Bank, 1.7% for Equitas Small Finance Bank and 2.1% for Ujjivan Small Finance Bank.
Pre-Covid, new small finance banks were fancied by markets, in preference to traditional small old private sector banks, due to their higher and faster growth potential as they cater to underserved clients. However post-Covid, thier target market segment is the most challenged and faster growth by most of the small finance banks will not only be difficult but also imprudent.