Ujjivan Financial - Small Finance Bank

My notes from Ujjivan Annual Report 2018:

Financial Highlights

  • Total income of 1582 Cr at 13.2 % growth Yoy with its 7 Cr profit
  • PAR at 4%, GNPA at 3.6% at NNPA at 07%
  • cost to income 67 % against last year 53 % due to banking transition
  • Average debt to net worth at 2.9
  • Gross loan book per branch from Rs 14 Cr to Rs 16 Cr
  • Gross loan book per employee 60 Lakh to 70 lakh
  • Customer retention ratio down from 86 % to 85 %
  • Book value at Rs 146
  • capital adequacy at 23 %
  • Headcount up from 10167 to 11242
  • Management Discussion and Analysis
  • Disbursement at 8052 Cr at 13% growth rate with loan book at 7560 Cr (18.5% growth)
  • 7.6 Lakh new borrower added
  • 65% of legacy loans converted in to deposits. However, major share is wholesale deposit
  • 14 % growth in employee salary
  • No red flag in management salary
  • 17% attrition
  • Continues to feature in best places to work
  • New initiative for risk and ALM management integrating with SAS
  • Average lending ticket size increased from Rs 25.7K to Rs 2 9.6K
  • Housing loan grew at 227% and MSM E at 298%. Together, their share increased from 2.4 % to 7.2 %
  • TAT reduced from 10 days to 4 days
  • 3 Lakh micro-finance Customers on boarded to banking

Demonetization Impact:

  • Rs 177 Cr write off and 311 Cr of credit cost
  • Repayment up from 89 % to 97.3 %
  • NNPA stood at 0.7 %
  • UP, Maharashtra and Karnataka were key contributors to NPA. UP PAR reduced
  • from 50% to 21 %, Karnataka 19% to 7 % and Maharashtra 16 4. to 746 due to write-offs
  • More than 99% repayment on post demonetization loans

Banking Development

  • 187 branches converted and remaining to be converted this year
  • Received scheduled bank status within 7 months of operation
  • Deposit base at 3772 Cr out of which 11 % from retail
  • cost of fund reduced from 11.4 % to 10 %
  • Lot of new technology developments
  1. 7000 handheld devices for instant account opening
  2. 64 seat phone banking
  3. ALM, CRM and many technology upgrades with Wipro as system integrator
  4. 146 bio metric ATMs enabled
  5. Mobile app with 4.7 score
  6. Focus on bio metric, paperless and faster turnaround time
  • 3554 new hires
  • 7 000 employees trained on banking
  • 14 IIM graduates hired as a part of management development program along
  • with 118 management trainees
  • Insurance tie-ups with multiple vendors
  • Introduction of Insta kits and Insta debit cards
  • Introduction of green pin concept
  • switch to Indian post leading improvement
  • 1255 recruitment specifically for banking requirement

Future plans

  • To grow MS ME and home loan verticals to contribute more to overall portfolio
  • Launch new financial products like 2 wheeler loans
  • Recruit 3000 new employees
  • focus on retail deposits this year and improve CASA
  • Convert all remaining branches into bank branches
  • Rs 400-500 Cr of additional investment in technology over next 5 years
  • No more BC model going further
  • Evolule (handheld) device count to increase from 7000 to 10000
  • One more phone banking support to be opened

Others

  • Company follows strong provisioning norms doing provisions beyond RBI mandate
  • New hires in housing and technology
  • 35 % of legacy loan get to be closed
  • Lot of employee executives seem to belong from Ghosh previous company and
  • have been staying with Ujjivan, for a long time
  • Increased efforts on ATL and BTL marketing

Risks

  • Will have to do priority sector lending including agri loans. Are these subjected to
  • political risk? How much regulation says as minimum to allocate?
  • How unsecured individual lending will be taken care of?
  • why ULIP based insurance products are being sold?

To be Understood

  • ALM mismatch analysis
  • RBI statutory requirement on capital adequacy

Nebo_Ujjivan AR18 Review.nebo_Page_9223372036854775807 1.pdf (955.5 KB)

Also attaching AR link with notes/comments:

10 Likes

Q1 FY19 : results, Presenatation and Press Release

1 Like

Was the result in line or below expectations??

Significantly better than Expectation, Especially when compared to Equitas. The provisions went down compared to March quarter, which wasn’t the case with Equitas.

It is quite different how the two SF banks have responded post demonetization. Equitas has taken a decision to reduce MFI exposure and now forms 28% of its book. It will only come down to 20% in next 2-3 years. Ujjivan, however, has still 90% of its book linked to MFI. As time goes by, in my opinion, it wont be apple-apple to comparison. Ujjivan will be compared with Bandhan and Equitas perhaps with AU/RBL though its a long way for them to reach there.

I believe both have tried to diversify in its own way from risk management perapective. The main difference being for equitas, primary diversification was based on products followed by geographical diversification whereas for Ujjivan, it haa been the opposite.

Anyone attended the concall organized today ? Can you please tell the summary of the concall ?

1 Like
1 Like

Macquarie on Ujjivan Financial

  • Maintained ‘Outperform’; cut price target to Rs 460 from Rs 490, implying a potential upside of 40 percent from the last regular trade.
  • Rising bond yield concerns overdone; Changing liability mix being overlooked.
  • Ujjivan on track to deliver 35 percent loan CAGR and 16 percent RoE by March 2021.
  • Correction in the past three months provides attractive entry price.

Source : BloombergQuint

1 Like

Ujjivan is currently trading at 1.7 times book. It maintains its guidance of 30% to 35% AUM growth for FY19. The MD has reiterated that the increase in its cost of funds is not likely to be more than 0.5%. Its legacy borrowings are going off the books and it is increasing its depositor base. All its branches will be converted to bank branches by the end of this financial year. Its cost of operations should stabilise and with AUM growth the profitability growth is likely to be good going forward. The company also seems to have its borrowing sources & costs sorted.

In this NBFC carnage Ujjivan has also taken a beating, dropping from Rs 400 to Rs 250 per share. Even during demonetisation the stock hadn’t dropped as much. And at that time it had mostly unsecured assets and there was a serious concern about the future of MFIs.

With interest rates going up the business valuation has to be adjusted. But what do fellow boarders think about the business at CMP? Does it look like a value pick?

Disc: Ujjivan is my largest holding

1 Like

I think Ujjivan has recovered well on the performance front and should perform well as a business over the next few years. However I think post the knock it took post demonetisation, perception of microfinance as a sector has taken a hit and hence it is kind of out of flavour and not getting the valuations & interest it got earlier. Once an sector is out of favour it may take time to get back in the market’s good books but if it continues to deliver on financials, i guess it is going to get back sometime. At this valuation looks attractive methinks.

Disc: Holding


Don’t see any major issues to Ujjivan in terms of asset liability mismatches. Now , if I go back to annual report notes -

  1. Last year mgmt spent year on getting stability back post demonetization , opening bank branches, building corporate liability profile

  2. Management did reasonably well on all the above activities and was transparent and ethical in testing times which is sign of a quality management and braught house back in order

  3. Coming to this year , focus is on building retail liability profile and improve CASA, bring down cost to income ratio and get back on growth path where new verticals will grow higher than microfinance with 20% plus growth rate .

  4. The above is also reflected in their hiring plan of 3000+ candidates over 11000 workforce

  5. Structurally , does not look like things have changed much on asset side if liability can be managed

  6. Valuation wise stock is available around 1.5 - 1.7 book value and if they can grow at 20%, TTM book value should be around 1.2 .
    I am comfortable based on growth basis, historic own valuation basis, relative valuation basis to tag ~2 book value valuation as going forward the business risk should reduce fruther by -

  7. Benefits of banking status in terms of CASA n all

  8. Diversification into other asset classes apart from microfinance

  9. StabilIng coat to income ratio and improving NPA
    Hence comfortable at current prices
    Disc : 4% of portfolio and 330 Rs and accumulating regularly

1 Like

Yes Saurabh, there is absolutely no problem with Ujjivan’s ALM. Uploading the ALM tables in Excel format, the data is from FY09. The -ve mismatch between outflows and inflows are highlighted in red. As you will see, they only have current mismatches in year 1-3Y and 3-5Y.

How I interpret this is, that most products of Ujjivan’s up until now were of maximum 2-year timeframes, so up to 2 years ALM is in surplus. Beyond 2 years, the current ALM may show mismatch but as every year the loan book is renewed, I believe those AL mismatches that are beyond 2 years are taken care of with renewed loan book. In their current form, they really are not mismatches.

The ALM profile will change significantly from here on, as longer tenure loans may form a decent part of the loan book and loan book is financed more and more through deposits as an SFB.

Ujjivan ALM.xlsx (20.9 KB)

2 Likes

While ALM has suddenly surfaced due to the current liquidity issue, I feel the key parameters to monitor for ujjivan would be -

  1. Growth - Q1 FY19 customer acquisition was flat. They need to show good customer and top/bottom line growth.

  2. Asset quality and collection - while a lot of issues seem to have sorted given how quickly things can change in micro finance markets would be applying a discount. y-o-y improvement is important.

  3. Cost of funds - Pace at which they are able to ramp up CASA, given they are late in the game compared to others.

  4. Cost to income ratio - How quickly are they able to bring the CI ratio down from 70% to 50% level.

Other than these ujjivan specific parameters, valuation given to other banks/sfbs by the market would matter.

I am holding and keen to see how the above parameters turn out in the next 2 quarters.

ALM mismatch occurs when average maturity of your assets is longer than your liabilities. For MFI loanbook, average maturity of loans is around 1 year. So, Ujjivan is never at the risk of ALM mismatch.

I have no position in this company .

I have started studying financial sector recently to invest. BULL in BEAR Market I have mentioned my current position .

Now I have some question on this company - from big picture view .

  1. This company has taken huge write offs last year becos of which its collection efficiencies, Net NPAs and PCR has improved … What makes you confident of current book value & the company will not do the same kind of write off say every 5 years .

  2. In loans - its repeat customer has increased from 67% and 71% in one year and loan growth is > 20% ie it had more than 20% growth in existing loanee customer base . Is company evergreening loans by giving more loans to same customers so that they can pay off old loans . Is there a RED Flag here …

  3. In borrowing its profile has shifted dramatically … CD and Institution deposit has increased and term loans from bank has reduced - What is implication of this change over – CASA is just 6% against 40% for good private banks - Can it impact its margins in coming quarters

  4. Finally with last year EPS of just 0.6 Rs and book value of 140 odd why do you think this stock is bargain at Rs 250

@kb_snn - Last year is not really comparable as they had booked huge losses on account of demonetization related writeoffs. EPS for 2017-18 is so low on that account. If you go into more detail you will see in Q1 of current year they have a EPS of 5.37 in one quarter itself, which one would hope is more representative!! And a price by book of 1.8 is pretty reasonable methinks if it is a well run company which is growing well.

On the ever greening question, this is primarily a microfinance book so the kind of loans broadly given are pretty much working capital kind of loans to people who cannot get loans elsewhere (think small shopkeepers, vegetable vendors to give some examples), these loans would be repetitive in nature. If a bank/ NBFC were solely in the business of WC finance, book would also look similar.

Are they evergreened? well possibility is there but that is the nature of business which you have to live with. Also it is most definitely susceptible to demonetization kind of shocks but in general spreads are higher. Model is different from other NBFC’s, definitely higher risk, possibly higher returns (atleast in good times - we haven’t seen listed micro finance companies in a full cycle to get a more rounded view). It is a bet on the bottom of pyramid growing blah blah, whether to invest or not is one’s individual decision.

2 Likes

@kb_snn Here are my responses:

  1. The company and the whole sector (because it was a sector phenomenon) may need to similar right offs in future based on trigger of risk parameters. So, one must understand the risks associated with sector/company and how these risks are getting addressed in future. So, one need to factor such risks in valuation. One prudent way could be build a book value growth forecast based on your own assumptions and factor 1 year of book loss every 5 year. One need to work on his assumptions and estimates and come up with his own valuation factoring the risks

  2. I believe there are strong CIBIL norms at individual level lending and they are so far following all the norms as per disclosure and hence, I see lesser possibility of this event. Also, now company is diversifying its loan book. The company has guidelines in terms of whom to lend, you may check. Fraud is always a possibility but fraud identification always needs connecting multiple dots from history and historically, I have not seen such patterns emerging in this company

  3. One must know that the banking license is hardly few quarters old and they are still in the phase of bank branch roll out. The priority for company post demonetization was to get 1. house in order and hence intentionally they stopped lending at some branches 2. Focus was on banking conversion and more on opening branches as per RBI mandate 3. Building corporate liability. Company has mentioned in annual report that their current year focus is building CASA and let us watch how they execute

  4. You can not do valuations based on an year where numbers were very non uniform (demonetization and its related impact on micro-finance industry). Also, would be better to valuate this industry on a book value basis. Current book value is around 1.5 and company is expected to grow at 20% (as per management and industry growth), has sorted out NPA issues (which was more sectoral than company specific and company’s disclosure practices were very transparent and conservative from cautionary point), diversification into multiple lending product reduces risk concentration, retail banking gives opportunity for lower cost of fund. So, up to one how much one wants to pay.
    As you said, you have started financial sector and its a very big industry and micro-finance/SFB is just a small part, would suggest to go through this thread, equitas, satin thread and microfinance thread in full detail as lot of questions asked and many new questions which may arise while studying a new sector are already discussed and addressed in some or other form :slight_smile:.

2 Likes

My till date big picture study of MFI sector …

MFI had three crisis since 2009 . First in 2009 post loan waiver , then in 2012/13 AP crisis ( which was biggest crisis and many MFI went bankrupt ) and third was post demon . Demo was slightly smaller in impact as compared to earlier crisis becos of RBI intervention and support .

SKS ( bharat inclusion ) has longer history on stock market as compared to Ujjivan – 2012 /13 was very ugly for this company –

Secondly these guys lend to subprime ( BOP ) & informal sectors of economy . GST and demon has impacted informal sector more and there is shift of business from informal to formal … That means subprime/ informal sector needed more loans to tide through tough times . That might explain higher growth of company with higher % of repeat customers …

Now If there is crisis once in 4 years and company is going to incurr of 30% ++ of TO as credit cost in that year, It means I cannot rely on book value for valuation … I will give this part of financial services a miss . Will focus on retail NBFC and private banks for further studies .

Thanks @lastgenesis for your kind revert …

Also Thanks @suru27 for detail replies to clear some of my basic doubts … I am sure you guys understand this segment better and have higher conviction …

1 Like

What you have said is applicable until they were operating as NBFC-MFI, now, them in banking space gives or would give more stability by having access to low cost deposits and CASA from liabilities side while other varied sources of income from segments like treasury,insurance,cross-sell,etc apart from their regular loan assets operation.

Risks pertaining to operating on sole MFI space is at least limited going forward is my opinion.