Listed small finance banks on a high with better asset quality, profitability

Kolkata: Small finance banks that were forced into listing a few years back in accordance with their bank licensing agreement are having their best year as they have cleaned up their books and extended their deposit franchise.

Equitas and Ujjivan lead the show with more than 80% jump in market capitalisation this year while Suryoday bounced back after dips in the previous two years. AU, already enjoying a high valuation, has delivered a consistent performance.

“Small finance banks had a tough Covid-19 period in FY21 and FY22 with higher NPAs affecting profitability and capitalisation with many banks struggling to raise capital. Fast forward to FY23 and H1FY24, SFBs have bounced back with improved asset quality and profitability,” rating agency CareEdge said in a note.

Share price of Ujjivan more than doubled this year while the price of Equitas jumped 82%. Suryoday saw 35% rise this year although it corrected 40% from the listing price in March 2021. AU, with over Rs 50,000-crore market capitalisation, delivered 14.7% price rise.

With credit cost under control, profit numbers for SFBs improved a lot. For instance, Ujjivan has its gross non-performing assets ratio at 2.35% at the end of September against 5.06% a year back. Equitas bettered its asset quality with gross NPA falling to 2.12% from 3.82%.

“We continue to maintain our constructive view on SFB space, given strong sectoral tailwinds, improving asset quality, and interest rate peak in sight,” said Shailesh Kanani, research analyst at Centrum Institutional Research. “This entails investing in both a well-managed SFB that is currently trading at reasonable valuation with potential for a re-rating as well as in an SFB that is undergoing a turnaround process (Suryoday), which has the potential to deliver higher returns if its recovery efforts prove successful,” he said.

Centrum in a report in June had said SFBs have established themselves as a formidable force in the market with remarkable growth in deposits and the inherent pricing power, given the nature of their customer base.Among these banks, AU has the largest balance sheet with Rs 65,029 crore advances and Rs 75,743 crore deposits at the end of September. The bank saw its share price jump 177% since its listing on July 10, 2017. AU was the first SFB to get listed.

Price of Equitas, which was listed in November 2020, skyrocketed 225% over its listing price.

Half of the 12 SFBs that exist today are listed. Jana received the approval from Securities & Exchange Board of India for its IPO last month. Utkarsh and Esaf entered the stock market recently.

The Reserve Bank of India’s recent move to raise risk weightage on consumer loans could not dampen the spirit for small finance banks as their exposure to consumer credit is relatively lower. Microfinance, which is purely unsecured lending, is mostly given as business loans and therefore out of the purview of higher risk weightage.

The impact on small finance banks, which are mandated to have at least 75% of their loans disbursed under priority sector lending, is expected to be lower in the range of 10-50 basis points, as their exposure to consumer credit is relatively lower, CareEdge said.

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