By HSBC Global Research
We recently met with the Head of Investor Relations at Ujjivan Financial Services. In the last year, the bank has seen a change in MD & CEO (May’19) and the listing of Ujjivan Small Finance Bank – the key subsidiary operating entity (Oct’19). The bank is focussed on emerging as mass-market bank beyond its roots as a microfinance lender. Key trends on assets (growth and diversification), liabilities and asset quality have shown improvement in recent quarters.
After a period of weak growth (average AUM growth of 10% YoY in FY18), AUM growth has averaged 51% YoY in 9MFY20. Its share of micro-banking has moderated to 78% as at end-Dec’19 (vs 87% at end-Dec’18). While secured MSE and affordable housing form the bulk of non-microbanking AUMs, the bank has also planned forays in unsecured MSE, micro-LAP and two/three-wheeler financing. In three years since the bank launch, deposits now form 77% of total liabilities. Retail deposits form 43% of deposits (vs 36% last year). The bank expects cost-to-income to moderate from 70% in FY20E to 55% by end-FY23E.
The impact of the Assam portfolio on the asset quality has been fairly limited. PAR (>0dpd) is at 2.1% at end-3Q20 (vs 1.6% at end-2Q20 and 2.4% at end-3Q19). After the IPO of Ujjivan SFB, the holding of Ujjivan Financial Services (promoter of SFB) in SFB has fallen to 83.3%. However, the regulations require the promoter’s shareholding to further reduce to 40% in five years.
Our estimates are unchanged. We expect 33% AUM CAGR (FY19-22e) with average RoA/RoE of 1.8%/18%. We use an excess return model to value Ujjivan and apply an unchanged 20% holding company discount on the value obtained to arrive at our target price of Rs 350 (Rs 352 earlier).