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Emkay believes the bank will take time to emerge from these issues and will also make its aspired transition into a Universal Bank difficult.

At the time when the benchmark equity indices BSE Sensex and NSE Nifty are hovering at their record high levels, a small finance bank has been eroding wealth since the beginning of the ongoing calendar year. Shares of the lender have tanked 53% to Rs 18.45 on August 23 from Rs 39.30 on December 31 last year. Of late, the lender posted a net loss of Rs 233.48 crore for the quarter ended June 30. It had reported a profit of Rs 54.65 crore in the same quarter last year.

Asset quality of the lender deteriorated during the quarter with the percentage of gross non-performing assets to gross advances moved higher to 9.79% in Q1FY22 over 7.07% in the preceding quarter and 0.97% in the corresponding quarter last year. Brokerages are cautious on the lender considering the asset quality and change in top management.

Latest update

Ujjivan Small Finance Bank recently hosted analysts call on August 20, 2021 led by Samit Ghosh and Sunil Patel to address the concern regarding higher attritions at senior management and board level in the recent past, followed by the latest resignation of its MD and CEO Nitin Chugh on August 18, 2021. Samit Ghosh (founder) was appointed as additional director on Ujjivan SFB’s Board with effect from August 20, 2021 along with three other newly appointed board members.

While admitting concern around asset quality and intent to clean the balance sheet in Q2FY22, the board assured continuity of strategic business initiatives under the new leadership. The immediate focus of the board would be to manage and improve the asset quality with upfront provisioning if required and strengthen the collection team. They will also rebuild the senior management team, ensure a smooth transition of the bank under the new leadership and prepare a roadmap to ensure a timely reverse merger process of holdco and the bank.

Brokerage view

ICICI Securities downgraded the stock to ‘Hold’ from ‘Add’ with a target price of Rs 20. “Considering the likely lumpy provisioning in Q2FY22 and the uncertainty over the appointment of new MD and CEO, we downgrade the stock to Hold with a revised target price of Rs 20 (earlier Rs 31) as we now value the stock at 1x FY23e PBV vs 1.5x earlier.”

On the other hand, Emkay Global Financial Services has a ‘Sell’ call on Ujjivan Small Finance Bank with a target price of Rs 17. It believes that the bank’s early-stage faltered strategy to mobilise deposits from MFI customers, lack of credible leadership to manage the liability business, and higher dependence on the vulnerable MFI business has led to its current status as a troubled small finance bank. The Covid-induced disruption aggravated its asset-quality problems.

“We believe the bank will take time to emerge from these issues and will also make its aspired transition into a Universal Bank difficult. Given the management-related uncertainty, weak liability profile, persistent asset-quality issues and sub-par return ratios, we retain our Sell rating on Ujjivan Small Finance Bank and cut target price from Rs 23 to Rs 17,” Emkay said in a report.