Investors with a high risk appetite and a long-term perspective can consider subscribing to the Suryoday Small Finance Bank IPO. The bank’s high exposure to the micro-finance segment (about 70 per cent of loan book) and its proformagross NPA of 9.8 per cent as of December 2020 is a concern. But comfortable capital adequacy (even before the IPO), improvement in collection efficiency post the Covid lockdown, better cost-to-income, return-on-asset metrics than peers, and reasonable valuation are positives.

At a price band of ₹303-305, the bank is valued at 1.96 times its book value per share (adjusted for issue proceeds) as on December 31, 2020.

Listed peers such as Ujjivan Small Finance Bank and Equitas Small Finance Bank, currently trade at similar valuations (about 2 times). The multiples of the listed small finance banks (Ujjivan and Equitas) factor in a likely dilution in shareholding (if they decide to raise capital) — following the RBI’s mandate to reduce the promoter stake in small finance banks to 26 per cent within five years of obtaining the SFB licence.

Promoters hold more than 80 per cent stake in Equitas and Ujjivan SFBs. With promoters already holding just 27.5 per cent stake in Suryoday, and the bank sitting on ample capital adequacy (CRAR of 41.2 per cent pre-issue), no such risks exist for Suryoday.

The offer comprises a fresh issue of ₹246-249 crore and an offer for sale from private equity firms to the extent of ₹332-334 crore. The market capitalisation of the bank works out to ₹ 3,237 crore at the upper end of the IPO price band.

Loan book

Suryoday focusses predominantly on the micro-finance segment with an average loan ticket size of ₹25,000.

While the micro-finance business has been growing at a fast pace (20-26 per cent CAGR over FY18-20), investors have turned wary of the unsecured MFI (micro-finance institutions) portfolios, despite the higher yields in the business. This is following the surge in the segment’s proforma NPAs, post the lockdown the political unrest in West Bengal and regulatory changes in Assam.

Suryoday has no presence in the North-Eastern States; about 77 per cent of its loan book predominantly flows from Tamil Nadu, Maharashtra and Odisha. While unsecured loans still constitute 74.6 per cent of the bank’s loan portfolio as on December 31, 2020, it is down from 94.81 per cent at the end of FY18.

Its loan book comprises micro-finance lending (70.4 per cent of loan book as of December 2020), commercial vehicle loans (9.4 per cent), affordable housing loans (6.3 per cent), business loans (both secured and unsecured) to MSME/SME and corporates (5.6 per cent), and financial intermediary group loans (4.8 per cent). The management aims to scale up the non-MFI book to 40 per cent of the loan portfolio.

The bank’s gross loan portfolio grew at a compounded annual growth rate (CAGR) of 47 per cent over FY18 to FY20, to ₹3,711 crore. The loan portfolio grew 5.3 per cent from March 2020 to ₹3,908 crore in December 2020.

While the bank’s gross non-performing assets (GNPAs) were lower at 0.8 per cent in the first nine months of FY21, it reported a spurt in proforma NPAs to 9.28 per cent in the quarter ended December 2020. While this is on the higher side, the bank’s improving collection efficiency —111 per cent (including arrears and advances) — and zero restructuring cases and high capital adequacy help its case.

Better than peers

Despite higher credit cost, the bank has been able to deliver better return ratios than its peers in the micro-finance lending business. Suryoday’s RoA was at 2.4 per cent in FY20, while Equitas SFB (MFI exposure limited to 20 per cent) and Ujjivan SFB delivered an RoA of 1.4 and 2.2 per cent, respectively, in FY20.

Bandhan Bank (a universal bank) with a higher RoA of 4.1 per cent in FY20, currently enjoys rich valuations of over thrice its December 2020 book value, despite the looming overhangs on MFI business in Assam and West Bengal (constituting 38 per cent of outstanding loan book).

Despite being a much smaller player than its listed peers (loan book size is one fourth of that of Ujjivan SFB and Equitas SFB), Suryoday has been able to contain its cost-to-income ratio to less than 50 per cent in FY19 and FY20, compared with more than 65 per cent in the case of Ujjivan or Equitas SFBs. This is following the bank’s dependence on low-cost customer-service touch points — about 661 (mostly leased premises) — over proper branch set-ups (554 banking outlets).

While the bank has no major expansion plans in the pipeline, it expects to continue to grow using the current model of low-cost touch points. This could provide further fillip to earnings, with the loan book scaling up from here on.

However, post the lockdown, following the lull in business and the surge in provisioning costs, the bank’s ROA dropped to 1.2 per cent and the cost-to-income ratio surged to 55.4 per cent. The return ratios (RoA) of Equitas and Ujjivan SFBs were at 1.2 per cent and negative 0.68 per cent, respectively in the first nine months of FY21.



Small finance banks, in the past, have been subject to strict diktats from the RBI. According to the prevailing SFB guidelines, Suryoday Small Finance Bank was supposed to be listed by November 2020. Despite the bank’s request, the RBI had not acceded to the extension in timeline.

Also, the promoters are required to hold at least 26 per cent stake in the bank up to January 31, 2022. While the promoters collectively now hold 27 per cent, one of them — Baskar Babu — had borrowed funds to maintain the stipulated holding. Consequently, 72 per cent of his current stake of 11.5 per cent in the bank is pledged to NBFCs. Any adverse situation leading to the NBFCs invoking this pledge can lead to non-compliance of RBI guidelines on part of the bank.

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