On the face of it, Ujjivan Small Finance Bank Ltd’s March quarter performance had several optically pleasing metrics. The lender’s net profit surged 86% on the back of earlier provisions written back into profits and an increase in non-interest income. Its disbursements were the highest ever in the month of March, growing a robust 31% for the quarter.
Indeed, in the recovery path for banks, Ujjivan will win prizes. After all, the small finance bank suffered in the beginning of FY21 as lockdowns resulted in existing borrowers defaulting on their repayments and new customers postponing plans to borrow. Small finance banks cater to one of the most vulnerable sections of society, the small individual and firms and in the pandemic this was a segment that suffered disproportionately. Another comfort for the lender was its steady growth in deposits. For the March quarter, deposits expanded 22% year-on-year (y-o-y), driven by retail deposits.
But this is where all the good news ends for the bank. There are enough troubling signs for investors from the March quarter performance that may shake the confidence on the outlook amid the pandemic’s second wave.
Ujjivan Small Finance Bank’s asset quality showed a big blow. The lender’s bad loans rose to 7.1% of the total book, from as low as below 1% in the previous quarter. To be sure, since the lender could not call defaulted loans as bad in the previous two quarters due to a judicial standstill on bad loan recognition, all bad loans were bunched up to be identified in the March quarter. Even so, the extent of increase in bad loans should worry investors. Further, the lender’s restructured loan pile at 6.8% of its loans is one of the highest in the industry. Although the bank didn’t restructure any loans in the March quarter, it has ?852 crore loans recast in total.
What’s more is that when stress has increased, the bank’s provision coverage ratio has not. The ratio was 60% for the March quarter, far lower than the 80% a year ago. To be fair, the bank continues to hold ?172 crore as provisions specifically against pandemic risks. But on the whole, its insurance against risks looks inadequate and could put pressure on future profits.
The bank’s shares have been under pressure since April, a reflection of the worries over asset quality. The lender needs to be able to contain stress on its balance sheet or at least build provisioning to a level that gives more confidence to investors.
News Source:- Livemint