As we enter the last day of subscription for the initial public offerings of Jana Small Finance Bank and Capital SFB, investors who have not looked at the issues so far have reasons to consider the banks. Jana SFB with assets of ₹21,000 crore is the fourth largest bank in the SFB category, while Capital with ₹5,500 crore would be the smallest SFB once listed.
What binds them is the attractive valuations which the two banks are seeking in the IPO. At less than 1.2x one-year forward price to book, Jana has literally held out a carrot to attract investors. At 1.5x one-year forward valuations, Capital also offers a proposition worth considering. Though in comparison, the latter’s asking price for its size of business seems to be a tad higher, it’s well within the acceptable valuations for banks at 1–2x price to book.
But beyond valuations, there is nothing similar between them. Whether in terms of loan book composition, yield and margin profile or the business focus, Jana and Capital are very different. What explains Capital’s marginally higher asking rates over Jana is its fully secured book over the latter’s 43 per cent share of unsecured loans. However, considering that Jana is a much bigger entity this shouldn’t be viewed negatively.
As for risks, investors buying into both or either of the stocks should note that the IPO is primarily to raise capital from the market and none of the large investors in either bank are liquidating their holdings in the bank significantly. However, post listing, given the requirement to reduce the promoter holding to 40 per cent and subsequently to 26 per cent, one should brace for secondary market sale by promoters.
In the two bad spells encountered by SFBs — 2016’s demonetisation and Covid which impacted the banking sector for almost two years starting March 2020, Jana was the worst affected. To that extent, past performance is barely an indicator of the bank’s capabilities. What’s appreciable though is the bank’s ability to stay focused on expanding its secured loans book, which accounts for 57.4 per cent total loans now, from around 40 per cent three years ago. The bank rebounded in FY23 posting impressive growth and return ratios (see table). Having gone through crises and funding constraints in the past, the bank has adopted a model where it will originate and sell-down a small part of its MFI loans which is helping the bank in keeping a lid on its unsecured loans and maintain healthy capital pool, liquidity and yield on assets. Immovable properties largely account for collaterals in the secured business, with micro LAP and affordable housing accounting for 32 per cent of total loans, MSME loans account for 15 per cent, 7 per cent exposure to term loans and the rest split between loan against deposits, two-wheeler loans and gold loans. That said, in H1 FY24, unsecured advances accounted for 43 per cent of total disbursements and investors need to watch out whether this trend persists. Also, as the share of secured loans increase, NIM or net interest margin (7.8 per cent in H1 FY24) may proportionally decline. However if it is maintained in the 7 – 8 per cent range, investors shouldn’t be concerned.
If Jana, like many other SFBs, is a case of microfinance lender converting to a bank, Capital SFB stands as the only local area bank to become a SFB. To that extent, Capital’s business model is tried, tested and has withstood more cycles. Apart from the fact that nearly 100 per cent of its business is secured, the unique selling proposition is its primary focus on small businesses. Capital’s core model is to ensure that the entire money of a business and/or the people running it is retained by the bank, whether as deposits and/or loans secured by some collaterals. The bank offers agriculture loans, MSME and trading loans (for working capital, machinery purchases etc) and mortgages (housing loans and loans against property). Compared to a pan-India outfit like Jana, Capital is largely concentrated in north India and operates out of Punjab, Haryana, Delhi, Rajasthan, Himachal Pradesh and Union Territory of Chandigarh. Being secured loans-focused, Capital’s NIMs are the lowest among SFBs at 4.04 per cent in H1 FY24. While an improvement in operational efficiencies and scale could help move the needle, it’s likely that Capital may always remain a laggard in the segment as all its peers are helped by an element of high-yielding unsecured loans, which could never be the case for Capital.
In terms of asset quality, Jana and Capital posted gross non-performing assets of 2.7 per cent in H1 FY24. While 1.5 – 2 per cent gross NPA is becoming the acceptable threshold for SFBs, with a completely secured book Capital’s numbers seem to be on the higher side. This may be because of higher share of restructured loans during the Covid period.