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|Thursday, 28 November 2019||
Ujjivan Small Finance Bank
Focused on micro finance
Listing is to comply with guidelines for SFBs to list within three years of commencement of business
Ujjivan Small Finance Bank commencing operations on 1 February 2017 is a mass market focused small finance bank (SFB) in India, catering to unserved and underserved segments. The bank is promoted by Ujjivan Financial Services (UFSL) - an NBFC which began operations in 2005 with the mission to provide a full range of financial services to the economically active poor who were not adequately served by financial institutions. Ujjivan Financial Services is among the 10 recipients of SFB license from the Reserve Bank of India (RBI) in 2015.
UFSLs business was primarily based on the joint liability group-lending model for providing collateral-free, small ticket-size loans to economically active poor women. The company also offered individual loans to micro and small enterprises (MSEs) and adopted an integrated approach to lending, which combined a customer touch point similar to microfinance, with the technology infrastructure and related back-end support functions similar to that of a retail bank. UFSL transferred its business undertaking comprising of its lending and financing business to Bank.
The Bank is spread across 24 states and union territories end March 2019. The bank has strong 4.94 million customers base operated from 552 Banking Outlets end September 2019. In FY2019 alone, the bank has operationalized 287 banking outlets. The bank has a network of 441 ATMs (including 18 ACRs), two 24/7 phone banking units based in Bengaluru and Pune that service customers in 11 languages, and a mobile banking application that is accessible in five languages as well as internet banking facility for individual and corporate customers.
The portfolio of products and services includes various asset and liability products and services. The asset products comprise: (i) loans to micro banking customers that include group loans and individual loans, (ii) agriculture and allied loans, (iii) MSE loans, (iv)affordable housing loans, (v) financial institutions group loans, (vi) personal loans, and (vii) vehicle loans. On the liability side, the bank offers savings accounts, current accounts and a variety of deposit accounts. In addition, the bank also provides non-credit offerings comprising ATM-cum-debit cards, Aadhaar enrolment services, distribute third party insurance products and point of sales (POS) terminals.
The bank has grown in a sustainable manner since beginning its operations. The gross loan book (including securitization/ IBPC) surged from Rs 6383.98 crore end March 2017 to Rs 11048.59 crore end March 2019 and doubled to Rs 12863.65 crore end September 2019.
The deposits base has galloped from Rs 206.41 crore end March 2017 to Rs 7379.44 end March 2019 and Rs 10129.85 crore end September 2019. The share of retail deposits has increased from 3.15% end March 2017 to 41.93% end September 2019. Casa to total deposits ratio has improved from 1.57% end March 2017 to 10.63% end March 2019 and was 11.87% end September 2019.
The bank has stable asset quality with gross NPA ratio at 0.85% net NPA at 0.33% end September 2019. The bank has raised the share of secured advances from 1.83% end March 2017 to 13.59% end March 2019 and 19.39% end September 2019.
The bank has posted net profit of Rs 6.86 crore in FY2018 and Rs 199.22 crore in FY2019, while net profit stood at Rs 187.11 crore for H1 of FY2020.
The bank has healthy capital adequacy ratio of 18.84% with tier I capital ratio of 18.16% end September 2019.
The bank intends to develop and offer a comprehensive suite of asset and liability products and services that will help attract new customers and deepen relationship with existing customer base. The focus customers of the bank are primarily young middle class customers across India. The bank would strategically invest to increase the use of technology in operations, while intends to reduce costs, increase operating efficiencies and move customers from an assisted mode to a self-service mode of digital and phone banking. It will selectively operationalize additional Banking Outlets, convert existing Asset Centres to Banking Outlets, expand ATM and ACR network and engage more business correspondent agents to grow customer base and increase advances and deposits. The focus will continue to remain on serving the unserved and underserved segments to build responsible banking behaviour by educating potential customers and increasing financial literacy.
The employee base of the bank has grown from 10,167 employees end March 2017 to 14,752 employees end March 2019 and 16,776 employees end September 2019.
The Offer and the Objects
The initial public offer (IPO) is to collect Rs 750 crore by issuing 20.833 crore shares at the lower band of Rs 36 per share (face value Rs 10 per share) and by issuing 20.270 crore shares at the upper band of Rs 37 per share. The issue is to be made through the book-building process and will open on 02 December 2019 and will close on 04 December 2019.
In terms of the RBI in-principle approval, RBI final approval and SFB licensing guidelines, the bank is required to list its equity shares on the stock exchanges within three years from the date of commencement of business by the bank, i.e., 31 January 2020. The bank proposes to utilize the net proceeds from the issue towards augmenting tier 1 capital base to meet future capital requirements. Further, there will be the benefits of listing of the equity shares on the stock exchanges, enhancement of the brand name and creation of a public market for equity shares in India.
A large section of the Indian population lacks access to formal banking services or is served by informal providers and the bank has a deep understanding of mass market and is in position tap this large customer base. Also, financial inclusion has always been a key priority for the Indian government.
The bank is among the leading SFBs in terms of branch count and geographical spread across India. It is present in 24 states and union territories encompassing 232 districts in India, operating 552 Banking Outlets (131 in north, 167 in south, 173 in east and 81 in west region) end September 2019. The diversified operations help to de-risk business by mitigating political and state-specific risks.
No single state constituted more than 18.00% of overall loan portfolio. The north, south, east and west regions contributed 19.58%, 34.70%, 29.52% and 16.20% of gross advances (including securitization/ IBPC) end September 2019. Metropolitan, urban, semi-urban and rural areas accounted for 29.65%, 34.80%, 29.92% and 5.63% of gross advances.
Its effective credit risk management is reflected in portfolio quality indicators such as robust repayment rates, stable portfolio at risk and low gross and net NPAs. Banks GNPA was the lowest among the small finance banks in India end March2019.
There is a strong track record of financial performance since inception through high rates of customer retention, geographical expansion, operationalization of banking outlets, improved productivity, lower credit cost and growth in customer base. Improving operational efficiencies, low turn-around time and network of banking outlets have resulted in the rise in profitability.
The bank has maintained strong Net Interest Margins of 10.31% in FY2018, 10.93% in FY2019 and 10.64% in H1 of FY2020. Cost of funds has been 9.01% and 8.33% in FY2018 and 2019, respectively, and was 8.43% in H1 of FY2020.
SFBs are subject to periodic inspections by the RBI and during the recent inspection conducted between January and February 2019, for FY2018, The RBI has made certain observations regarding (i) the lack of a system to tag PSL advances, mis-categorising of PSL advances, and earning of processing fees on PSL loans; (ii) lack of a rating methodology to assess borrowers; (iii) high proportion of bulk deposits, and concentration of deposits in top 20 depositors; (iv) liability products being offered from certain Asset Centres without RBI approval; (v) lack of a fraud management system, weak customer grievances redressal mechanism and deficiencies in AML and KYC protocols.
The annualized EPS on post-issue equity works out to Rs 2.2 for H1 of FY2020 compared with Rs 1.2 for FY2019. At the price band of Rs 36 to Rs 37, P/E is 16.6 to 17.1 times of H1 of FY2020 EPS.
The bank has issued 71,428,570 equity shares for cash consideration aggregating to Rs 250 crore in a pre-IPO placement at Rs 35 per share in November 2019.
Post-issue, the book value (BV) will be Rs 16.4, while adjusted BV (ABV) net of net non-performing assets works out to Rs 16.2 per share at upper price band.
The scrip is being offered at price to BV of 2.25 times at the upper price band. Among peers, AU Small Finance Bank is trading at P/BV of 7.16 times and Bandhan Bank at P/BV of 6.25 times.
UFSL is trading at 1.84 times and its comparable peer Equitas Holding is trading at 1.23 times on a consolidated basis.
*Discount of Rs 2 per share for eligible UFSL shareholders bidding in shareholders reservation portion