Loan

Ujjivan Small Finance Bank Shares Drop Over 7.5% as Bank Cuts Loan Growth Forecast

Ujjivan Small Finance Bank: In today’s intraday trading session, Ujjivan Small Finance Bank witnessed a decline of 7.56% in its shares, dropping to a three-week low of ₹44.70 per share. This decline occurred as management revised the bank’s loan growth guidance downward by nearly 20% for the financial year 25, which is lower than the earlier projection of 20%-25%. Additionally, the bank increased its loan cost guidance from the previous 1.4%-1.5% to 1.7%.

The adjustment comes amidst escalating tensions in microfinance in hotspot states like Punjab, Haryana, Gujarat, UP, and Kerala. In response, the bank has decided to slow down disbursements (without any restrictions) in these identified hotspots, focusing on improving profitability and concentrating on individual loans.

Management noted that the microfinance segment will face higher loan costs in financial year 25, primarily from Punjab, Haryana, Gujarat, and UP. The stress began to intensify from the second quarter of financial year 24, prompting the bank to actively slow down loan growth in these flagged hotspots.

Ujjivan Small Finance Bank Shares Drop Over 7.5% as Bank Cuts Loan Growth Forecast

In Punjab and Haryana, the debt waiver movements increased tensions, while in Gujarat, the arrival of lenders led to lax borrower discipline, and a slowdown in the diamond industry reduced income levels.

According to domestic brokerage firm Antique Stock Broking, there was more than a 2% increase in loan costs in 29 districts of UP where the bank operates its microfinance business, compared to an average cost of less than 1.5%.

The brokerage firm added that while challenges exist in the industry, Ujjivan had already factored in their impact in its figures. Their EPS estimates are approximately 10%-15% lower for financial years 25-26 from general consensus. The assessment is appropriate for an expected RoA of 2.7%-2.3% and RoE of 20%-17% for financial years 25-27, with valuation at 1.1x FY26 and 0.9x FY27 BV, thereby maintaining a ‘Buy’ rating.

Meanwhile, management acknowledged that the bank complies with RBI guidelines for a universal banking license, including criteria like GNPA below 3%, NNPA below 1%, net worth exceeding INR 10 billion, being listed as a small finance bank for five years, and having a diverse business portfolio.

With the universal banking license, the bank will have 5%-6% freed capital, reduced priority sector lending (PSL) requirement from 75% to 40%, and the removal of the condition to maintain 50% of the portfolio in small-ticket loans.

 

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