Tag: ujjivan sfb

High provisions and uncertainty over the appointment of a new managing director will weigh on the valuation of Ujjivan Small Finance Bank in the near future following the abrupt exit of current MD Nitin Chugh, according to analysts.

The stock has dropped 31% in the last one month and is currently trading at around Rs 19,

However, during the conference call with analysts, the management sounded confident about tackling the issue, with the help of new board members, appointment of a special officer and interim CEO for better coordination between the board and business teams, according to analysts.

Asset quality issues

Chugh’s resignation comes at a time when the company is grappling with asset quality problems. The CFO had also resigned a month ago. Ujjivan SFB could see more near-term correction, with a KMP resigning. Compared to listed peers, USFB saw more stress formation, as indicated by the spike in gross non-performing asset coupled with existing and likely restructuring. This may suggest that asset quality pain for Ujjivan SFB has not ended yet and the bank could see more balance sheet stress emanating. During more stable times, overall gross stress was 1% of loans that surged to 15.3% in Q1FY22 in wake of the pandemic, as GNPA further escalated to 9.8% with restructuring being at 5.5% of loans.

Chugh’s tenure

When he assumed the office of the MD & CEO in December 2019 Ujjivan faced four major challenges, — hold-co dilution, opex control, retail deposit build-up, and improving secured loan share. The bank was on path to sort three of these four issues. On the hold-co dilution issue, the RBI via letter dated 9th July 2021 permitted SFBs and holding companies to apply for reverse merger, which signalled that UFSL could be reverse merged with Ujjivan SFB. During Chugh’s tenure, the bank did well on deposits, as CASA ratio consistently increased from 11.6% in Q3FY20 to 20.3% in Q1FY22. Opex was also controlled, with opex to assets in FY21 seeing a sharp reduction to 6.2% from 8.2% in FY20. While transition towards a secured loan profile was progressing, with secured share rising from 21% to 32% on a YoY basis in Q1FY22, material exposure (estimated 80% of loans) to MFI and secured SME severely affected asset quality.

Asset quality challenges for Ujjivan SFB

Collection efficiency (CE) dropped sharply in May/June 2021 to 72%/78% which improved to 93% in July 2021. In June, collections in the South/East were 63%/78% compared to 92%/83% in North/West. Under OTR-1, CE that was 75% dropped to 33%/37% in May 2021/Jun’21, which improved to 50% in July 2021. 150,000 customers, who were NPAs as of June 2021 started paying in July and saw overall upgrades of Rs 300 crore excluding restructuring. Restructured pool stood at Rs 780 crore (5.5% of loans versus 5.8% last quarter) and further Rs 500 crore entered one-time restructuring (OTR) in July 2021. Additionally, Rs 300 crore could enter OTR by September 2021. However, total restructuring could be somewhat less than Rs 1,600 crore, as there could be an overlap between OTR-1 and OTR-2. Gross stress as at Q1FY22 was 15%, with a cover of 60% (was 13% last quarter, with a 50% cover).

Valuation, view and risks

“Resignation of a key managerial personnel could lead to near-term pressure until someone is appointed, though stress formation is partly priced in. We had downgraded FY22E earnings by 76% due to loss in Q1FY22 and likely provisions in FY22. MFI/MSE loan exposure at 80% is affecting USFB, leading to stress build-up and protracted recoveries,” Centrum Broking said in a report.