Ujjivan Small Finance Bank rating – ‘Hold’: Collections improved to 95% by September

Notably, despite top-management attrition, Ujjivan’s journey towards building secured assets (32% of loans) and granular liability franchise (retail deposit share at 52%) is progressing well.

Ujjivan Small Finance Bank’s (Ujjivan) net loss of Rs 2.7billion has to be seen in the context of book clean-up as indicated earlier and lower attrition, process stabilisation and the board submitting two recommendations to the regulator for the post of MD & CEO. Roll-out of 100 days’ action plan yielding desired results as reflected in – i) PAR reducing to 18.9% from 30.8% in June’21, ii) new log-ins in most business segments at pre-Covid level and iii) management maintaining its full year credit cost guidance of Rs11-12billion despite providing ~Rs9billion during H1FY22.

Notably, despite top-management attrition, Ujjivan’s journey towards building secured assets (32% of loans) and granular liability franchise (retail deposit share at 52%) is progressing well. Taking cognisance of improved collections, sharp reduction in PAR portfolio and encouraging business volume since October’21, it expects much better performance in H2FY22e. However, nearly ~50% of restructured book slipping into NPA from resolution framework 1.0 raises concern over near term asset quality given the total restructured pool of Rs15billion (~10% of loans). It carries total provision pool of 10%, including floating provision of Rs2.5billion and 34% coverage on restructured book. Maintain ‘hold’.

Steady improvement in collections during Q2FY22: Concentrated efforts on collections led to sharp reduction in PAR 0 portfolio to 18.9% in September’21 from 30.8% in June’21. Collections improved steadily to 95% by September’21 from 78% in June’21; however, higher loss of working days due to festivals in October’21 resulted in marginal dip in collections to 94%. Within states, Maharashtra and West Bengal lag average pan-India collections while Tamil Nadu witnessed drop in collection for two consecutive months.

Credit cost in H2FY22e likely to be lower than H1FY22: Ujjivan’s GNPL increased to 11.8%, while NNPL stands at 3.3% due to higher slippages at Rs6.6billion (5% of AUM). Further, the bank restructured Rs9.6billion worth of loans during Q2FY22, taking total restructured book to Rs15billion or 10% of loans. Collections in restructured portfolio have also remained healthy at 86% in September’21. Total provision cover stands at 10%, including floating provision of Rs2.5billion. After fair assessment of its loan portfolio by third party, it guided for credit cost estimate of Rs11-12billion in FY22e and it maintained the same despite it providing Rs9billion in H1FY22e, implying much lower provision in H2FY22e.

Progression towards building secured assets and granular liability franchise is encouraging. Disbursements during Q2FY22 improved sharply by 114% YoY and it continued to focus on disbursing higher towards secured assets. As a result, the share of secured assets increased to 32% as of September’21 from 30% in June’21. Going forward, Ujjivan will continue to focus on scaling up affordable home loans, gold loans, vehicle loans and MSME loans. Deposits grew 31% YoY to Rs141billion with CASA ratio at 22.5% and share of retail deposits at 52%.