Street concerned over Ujjivan SFB's asset quality hit in Q4; stock sinks 3%

Gross non-performing asset (GNPA) ratio rose from 0.97 per cent last year and 0.96 per cent (4.8 per cent as per pro-forma) in Q3FY21 to 7.1 per cent in Q4FY21

Shares of Ujjivan Small Finance Bank tumbled 8.1 per cent to hit an intra-day low of Rs 28 apiece on the BSE on Wednesday, but eventually settled 3.3 per cent lower at Rs 29.6 apiece on the BSE, after the lender's asset quality worsensed in the March quarter. In comparison, the benchmark S&P BSE Sensex ended 0.58 per cent lower.

Gross non-performing asset (GNPA) ratio rose from 0.97 per cent last year and 0.96 per cent (4.8 per cent as per pro-forma) in Q3FY21 to 7.1 per cent in the quarter ended March 2021 which worried Street. Net NPA ratio, meanwhile, deteriorated from 0.2 per cent (Q4FY20) and 0.05 per cent (Q3FY21) to 2.93 per cent.

That apart, the lender's collection efficiency stood lower at 94 per cent in March 2021 for overall loans due to continued stress in Assam, West Bengal, Maharashtra and Punjab, that cumulatively contribute 29 per cent of portfolio. The collection efficiency further fell to 89 per cent in April 2021 due to the lockdowns, while portfolio at risk is 14.9 per cent, indicating continued elevated stress.

Overall, recognized stress pool is now 11.8 per cent (11.1 per cent in Q3) of loan book. However, restructured MFI loans are now 6.8 per cent of MFI loans (4.7 per cent of overall loans), down from 8.5 per cent in Q3, due to NPA recognition and partial recovery. Besides, the bank wrote off just Rs 74 crore in FY21 (0.5 per cent of loans) unlike aggressive write-off by peers.

"We believe that the bank's long-term prospects hinge on the ramp-up of its liability pool and asset-side product diversification away from MFI (vulnerable to shocks such as Covid-19, waivers and natural calamities). These factors structurally weigh on margins. We estimate the bank's RoA/RoE to improve but remain moderate at 1.3-1.7 per cent/9-15 per cent over FY22-24E," said analysts at Emkay Global. The brokerage has a 'sell' call on the stock with a 12-month target price of Rs 25.

Those at Antique Stock Broking, however, opine that the lender may cushion impact on margins if it could scale up its deposits inflow. "Despite Ujjivan's best-in-class processes in MFI, it is facing asset quality issues from the adverse event. Scaling up of liabilities can provide some relief to margins and the constant effort to reduce the operating expenses should improve the operating performance but elevated credit costs can impact profitability," it said in its post-result report with a 'hold' rating on the scrip and a target price of Rs 33.

In Q4FY21, Ujjivan SFB's net interest margins declined to 7.9 per cent from 11.2 per cent YoY.

Meanwhile, the lender's net profit nearly doubled to Rs 137 crore for the quarter under study on account of rise in other income and write back in provisions. The bank's net profit was Rs 73 crore in the year ago period. Its operating profit fell about 17 per cent on year to Rs 159 crore as against Rs 191 crore in the year ago period with interest income falling 16 per cent at Rs 618 crore as against Rs 738 crore over the same period.

HDFC Securities observes that USFB made no provisions for its stressed portfolio during the quarter despite high slippages, utilizing its Covid buffer instead. With provision coverage ratio (PCR) at 60 per cent, Covid buffer at 1 per cent of loan book and severity of the second wave of pandemic on economic activity, it expects credit costs in FY22 to remain elevated. The brokerage has also increased its average provisions estimates for FY22-FY23E to 3.2 per cent from 2.7 per cent.

Given the uncertainty around credit costs going-forward, both, HDFC Securities and Kotak Institutional Equities, have 'Add' rating on the stock with target prices of Rs 37 and Rs 34, respectively.

"Ujjivan SFB clocked AUM growth of 11 per cent QoQ with microfinance growing 7 per cent seqeuntially. Overall disbursements grew around 30 per cent YoY (MFI at 16 per cent YoY). Retail deposit momentum also continued with CASA ratio at 21 per cent (up 300bps QoQ) and retail deposits at 48 per cent of total deposits... Our ADD rating is driven by the bank's ability to survive adverse scenarios given its diversified geographical presence, very strong capital levels and improvement in liability profile," said analysts at KIE. 

The Bengaluru-based small finance bank targets the financially unserved and underserved segments and focuses on financial inclusion of the "economically active poor" who were not adequately served by financial institutions.