Ujjivan Small Finance Bank (USFB), headquartered in Bangalore, India, is a small finance bank focused on providing financial services to underserved and unbanked populations. As of Q3 FY25 (quarter ended December 31, 2024), USFB has demonstrated resilience amid industry challenges, particularly in the microfinance sector, while pivoting toward a more diversified and secured loan portfolio. This analysis draws from the Q3 FY25 Earnings Conference Call Transcript dated January 23, 2025, to evaluate its growth strategy, future outlook, challenges, key advancements, and whether it’s a good investment opportunity as of February 28, 2025.
Growth Strategy
USFB’s growth strategy revolves around diversification, customer retention, and operational efficiency. Key elements include:
- Shift Toward Secured Lending:
- Objective: Reduce reliance on unsecured microfinance loans by increasing the share of secured loans (e.g., affordable housing, micro-mortgages, MSME, vehicle finance, gold loans, and secured agriculture).
- Progress: Secured loans grew from 30% of the portfolio in Q3 FY24 to 39% in Q3 FY25, with a 13% quarter-on-quarter (QoQ), 33% year-to-date (YTD), and 52% year-on-year (YoY) increase. The bank aims for secured loans to reach 40%-42% by FY25-end and potentially 60% by FY26 or earlier.
- High-Yield Products: Emphasis on high-yielding secured products like micro-mortgages (34% QoQ growth), vehicle finance (43% QoQ, 155% YoY), and gold loans (expanded to 198 branches from 63 in March 2024) to offset yield compression.
- Microfinance Stabilization and Interest Rate Reduction:
- Micro Group Loans: Despite a 16% QoQ decline in disbursements (Rs. 2,029 crores in Q3), microfinance remains 45% of the loan book. USFB reduced interest rates by 115 basis points (bps) for group loans and 75 bps for individual loans effective January 1, 2025, to attract quality borrowers and align with the three-lender norm starting April 2025.
- Individual Loans: Comprising 15% of the portfolio, individual loans grew 21% YoY, targeting graduating group loan customers with strong repayment histories.
- Deposit Mobilization:
- Focus: Enhance granular deposits, especially CASA (Current Account Savings Account), which grew 15% YoY to Rs. 8,662 crores (25% of total deposits). Total deposits reached Rs. 34,494 crores, up 16% YoY, with retail deposits at 73%.
- Digital Push: Introduced digital current accounts, savings accounts, and fixed deposits to improve convenience and reduce cost of funds.
- Digital Transformation and Analytics:
- Leveraging analytics for faster credit assessments, productivity enhancement, and identifying growth geographies. Launched a digital current account (opened in under 60 minutes) and plans to roll out Ujjivan Pay (UPI app) in Q4 FY25.
- Transition to Universal Banking:
- The board approved an application for a universal banking license on January 23, 2025, to be submitted to the Reserve Bank of India (RBI). This aims to broaden product offerings and strengthen competitiveness.
Future Outlook
USFB’s future outlook is cautiously optimistic, with a focus on sustained growth and stability:
- Loan Book Growth:
- Secured loans are projected to grow 50% YoY in FY25, contributing 40%-42% of the portfolio by March 31, 2025. Overall loan book growth is expected at 8%-9% for FY25, with individual loans growing around 12%.
- Long-term target: Secured loans could reach 60% by FY26, reducing exposure to volatile microfinance cycles.
- Asset Quality and Credit Costs:
- Gross Non-Performing Assets (GNPA) and Net NPA (NNPA) stood at 2.7% and 0.6%, respectively, in Q3 FY25. Credit costs are guided at 2.3%-2.5% for FY25, with stabilization expected as microfinance stress subsides.
- Portfolio-at-Risk (PAR) is expected to stabilize in Q4 FY25 and decline over the next 2-3 months, supported by improved collections and higher disbursements.
- Profitability:
- Net Interest Margin (NIM) was 8.6% in Q3 FY25, expected to remain between 8.6%-8.8% for FY25 despite a shift to lower-yielding secured assets. High-yield secured products will mitigate compression.
- Return on Assets (ROA) and Return on Equity (ROE) were 1.1% and 15.2%, respectively, in Q3 FY25 (adjusted). ROA may face pressure as secured loans grow, but management aims to maintain profitability through cost control and other income streams.
- Industry Trends:
- Microfinance is stabilizing, with demand reviving in states like West Bengal, Uttar Pradesh, and Bihar. The three-lender norm (effective April 2025) will consolidate the industry, favoring larger players like USFB with competitive rates and customer retention strategies.
- Deposit and CASA Growth:
- Plans to improve CASA ratio and reduce cost of funds (7.57% in Q3 FY25) through digital banking and targeting affluent, non-resident, and corporate salary customers.
Challenges
USFB faces several challenges that could impact its growth trajectory:
- Microfinance Volatility:
- Despite improvements, microfinance remains vulnerable to external shocks (e.g., community issues, economic slowdowns). PAR for group loans was 6.6% in Q3 FY25, and slippages rose to Rs. 298 crores from Rs. 197 crores QoQ.
- The three-lender norm may increase PAR if customers with multiple lenders (e.g., Ujjivan +3 or +4) fail to renew loans, potentially elevating credit costs in Q1-Q2 FY26.
- Margin Pressure:
- The shift to secured lending and interest rate cuts could compress yields (18.2% in Q3 FY25 vs. 18.9% in Q2). While high-yield products help, maintaining NIMs below 9% in FY26-FY27 will be challenging.
- Regulatory and Operational Risks:
- Transitioning to a universal bank requires RBI approval and significant investments in infrastructure, compliance, and talent, which could strain operating costs (6.2% of average assets in Q3 FY25).
- Competition from larger banks and fintechs may intensify as USFB scales its secured and digital offerings.
- Execution Risks:
- Expanding newer segments like gold loans (Rs. 115 crores) and vehicle finance (Rs. 375 crores) requires operational expertise and market penetration, which may take time to yield significant returns.
Key Advancements
USFB has made notable strides that strengthen its position:
- Portfolio Diversification:
- Secured book growth (52% YoY) and new product launches (e.g., gold loans in 198 branches, vehicle finance at Rs. 375 crores) showcase successful diversification.
- Collection Efficiency:
- Bucket X collections improved to 99.2% in Q3 FY25, with states like West Bengal and Bihar showing month-on-month gains. Added 345 staff to the collection team (total 2,260), boosting SMA resolutions (e.g., SMA-1 from 25% to 35%).
- Digital Innovation:
- Digital current accounts, savings accounts, and fixed deposits enhance customer acquisition in 250 non-branch locations. Ujjivan Pay’s upcoming launch signals a strong digital banking push.
- Asset Quality Management:
- Sold Rs. 270 crores of stressed assets to an Asset Reconstruction Company (ARC) in Q3 FY25, maintaining a Provision Coverage Ratio (PCR) above 70%-75%.
- Leadership Strengthening:
- Appointed Balakrishna Kamath as CFO (30+ years in corporate finance) and Hitendra Jha as Head of Retail Liabilities & TASC (23+ years in banking), enhancing strategic execution.
Is Ujjivan Small Finance Bank a Good Buy?
As of February 28, 2025, evaluating USFB as an investment requires weighing its strengths, risks, and market context. Here’s a detailed assessment:
Positives
- Diversification Success: The rapid growth in secured lending (39% of portfolio) reduces reliance on microfinance, offering stability and scalability. High-yield segments like micro-mortgages and vehicle finance support profitability.
- Resilient Asset Quality: Despite microfinance stress, GNPA (2.7%) and NNPA (0.6%) remain manageable, with a strong PCR (70%-75%) and proactive ARC sales.
- Growth Potential: Secured loans targeting 50% YoY growth in FY25 and a potential universal banking license signal long-term upside.
- Valuation: Assuming a stock price around its historical range (e.g., Rs. 40-50 as of early 2025, based on BSE Scrip Code 542904 trends), USFB may trade at a price-to-book (P/B) ratio of 1.5-2x, reasonable for a growing small finance bank with ROE at 15.2%.
- Industry Tailwinds: Microfinance stabilization and the three-lender norm favor larger, competitive players like USFB.
Risks
- Microfinance Uncertainty: Potential PAR increases post-April 2025 (three-lender norm) could raise credit costs, impacting FY26 profitability.
- Margin Compression: NIMs may dip below 9% as secured loans dominate, pressuring ROA unless offset by cost efficiencies.
- Execution Risks: Scaling new segments and transitioning to universal banking carry operational and regulatory uncertainties.
- Market Sentiment: Small finance banks often face volatility in investor confidence during industry downturns.
Investment Recommendation
USFB is a “Buy” for long-term investors with moderate risk tolerance, contingent on a few factors:
- Price Point: At a P/B below 2x or price-to-earnings (P/E) below 15x (indicative, as exact financials beyond Q3 FY25 aren’t provided), it offers value given its growth trajectory.
- Horizon: A 2-3 year horizon aligns with its secured lending ramp-up and potential universal banking approval, which could rerate the stock.
- Risk Management: Investors should monitor Q4 FY25 results (due April-May 2025) for microfinance stabilization and credit cost trends.
For conservative investors, a “Hold” or phased accumulation is prudent until clarity emerges on FY26 slippages and the universal banking transition. The stock’s appeal lies in its transformation into a diversified lender, but near-term volatility in microfinance warrants caution.
Conclusion
Ujjivan Small Finance Bank is strategically repositioning itself as a diversified, resilient player in India’s banking sector. Its growth strategy emphasizes secured lending and digital innovation, with a promising outlook tempered by microfinance challenges and execution risks. Key advancements in asset quality and leadership bolster confidence, making it an attractive investment for those betting on its long-term potential, provided entry is at a reasonable valuation. As of February 28, 2025, USFB merits consideration as a growth story in the small finance banking space.