ESAF SFB IPO: Should you subscribe?

Owing to regulatory reasons, it’s raining initial public offerings of small finance banks (SFBs). Utkarsh SFB started the trend and Kerala-based ESAF SFB is the next in line.

With two more days of subscription left, valuation at around 1.5x FY23 price to book is the key attraction in ESAF SFB’s public offering. In terms of business or value proposition, the bank, however, doesn’t offer anything significantly different from other listed SFBs or those waiting to list in the near term. That said, if investors who missed the listing bonanza at Utkarsh are tempted to consider ESAF merely for its pricing, they should note that the former was more finely priced at 1x price to book, leaving all the upside on the table.

Operations

ESAF is among the 10 entities who received SFB licence in 2015 and the bank commenced operations in March 2017. While its microfinance (MFI) business has a long vintage from 1995, as a bank, the loan book is unseasoned. MFI loans account for 75 per cent of the book, gold loans and agri loans account for 13 per cent and 5 per cent respectively. Rest of the book includes vehicle loans, mortgages, MSME loans, loans to mid and large corporates; share of which to the loan book is very negligible at 1–4 per cent. Average tenure of ESAF’s book is less than three years, and in the current form it is more representative of NBFCs than banks.

At 10.67 per cent net interest margin or NIM in FY23, for an MFI-heavy book, ESAF’s NIM seems to be a tad lower than peers’, despite cost of funds at 6.19 per cent. While the bank has posted NIM of 3.08 per cent and cost of funds at 1.72 per cent in June 2024 quarter, these are unannualised numbers and do not lend themselves to comparison. Hence, to comment about the bank’s Q1 performance may not be valid.

The challenge for ESAF would be in repositioning itself and build a long-tenure book, while also weathering cost pressures.

From an asset-quality perspective, FY22 was a year of recuperation post Covid, spent on cleaning the book. From 6.7 per cent gross non-performing assets in FY21, it rose to 7.8 per cent in FY22. In FY23, these numbers reduced to 2.49 per cent and 1.13 per cent net NPA, which provides comfort on the overall asset quality.

Strengths 

Two positive aspects favouring ESAF are its diversified business presence and its deposit franchise. Though the bank has its origin in Kerala, ESAF has managed to reduce the home State dependence reasonably over the years. Kerala accounted for 43 per cent of ESAF’s gross advances as of Q1 FY24 vis-à-vis 56 per cent in FY21.

Semi-urban and rural regions account for 72 per cent of its total banking outlets, making it a well-entrenched bank from a financial inclusion perspective. As with most SFBs, ESAF has also had a good experience on this front, with the share of retail to total deposits at 89 per cent in Q1. While the number has eased from 98 per cent in FY21, this is also a positive representation of the bank’s ability to mobilise deposits from all kinds of customers. That said, 80 per cent of ESAF’s deposits originate from Kerala, posing geographical concentration.

Overall, while ESAF has a little over six years of experience, from an investor perspective it’s almost like a brand-new outfit, post Covid. Therefore, while IPO pricing is attractive, if an investor must consider the stock from a long-term proposition, ESAF SFB would be best suited for those willing to take reasonable risk.

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