Chugh’s exit, provisioning may weigh on Ujjivan SFB
Analysts see more pain in store for the lender, cut earnings estimates
The resignation of Nitin Chugh, managing director and chief executive officer of Ujjivan Small Finance Bank, has triggered a panic sell-off in the stock as the scrip has plunged 23 per cent on the BSE over the past week as against a 0.1 per cent decline in the benchmark S&P BSE Sensex.
Including Monday’s fall of 6.35 per cent, the stock has tumbled 31 per cent in six days. In comparison, the Sensex closed 0.4 per cent higher.
The resignation was announced in an exchange filing on Thursday. The move comes amidst the bank’s persistent underperformance on the asset quality front, delayed recognition/correction of non-performing assets (NPAS), as well as largescale attrition at the higher and lower-middle level, which, according to analysts, doesn’t bode well for its growth.
Earlier this month, directors Harish Devarajan and Mona Kachhwaha had resigned, while Chief Financial Officer Upma Goel had tendered her resignation on July 7. At the lower-middle level, analysts attribute the mass exodus to the work environment rather than remuneration.
“The churn in the management team and board of directors is likely to have a knock on effect on the growth strategy of the bank, especially the exit of Chugh who was spearheading the digital initiatives of the bank. Considering the uncertainty in terms of incoming top management and the future growth outlook, we are putting Ujjivan SFB ‘under review’,” said a note by Edelweiss Securities.
Analysts at Emkay Global have a ‘sell’ rating on the stock as they believe the financial improvements achieved under Chugh’s tenure could slow.
During Chugh’s tenure, which began in December 2019, the bank did well on deposits, as CASA (Current Account Savings Accounts) ratio increased consistently from 11.6 per cent in Q3FY20 to 20.3 per cent in Q1FY22. Operating expenses (opex), too, were controlled, with opex to assets ratio in FY21 seeing a sharp reduction to 6.2 per cent from 8.2 per cent in FY20.
However, while transition towards a secured loan profile was progressing, with secured share rising from 21 per cent to 32 per cent year-on-year in Q1FY22, material exposure (80 per cent of loans) to MFI and secured SME severely affected the lender’s asset quality.
The bank’s overall recognised stress pool stands at 15.6 per cent of the loan book (including gross non-performing assets of 9.8 per cent/restructured loans of 5.8 per cent) and the portfolio-atrisk has swelled to 30 per cent as of June, 2021.
“Compared to listed peers, Ujjivan SFB saw more stress formation, as indicated by the spike in GNPA coupled with existing and likely restructuring. This may suggest that asset quality pain for the bank has not ended yet and the bank could see more balance sheet stress emanating,” observed analysts at Centrum Broking.
The immediate focus of the bank would be on bringing back old employees and retaining good talent, along with ensuring smooth transition of the top management, said a report by ICICI Securities.
Earnings downgrade
Given the development, analysts see more pain in store for the lender and have cut their earnings estimates.
Centrum Broking has downgraded FY22E earnings by 76 per cent due to loss in Q1FY22 and likely provisions in FY22. Analysts at Kotak Securities, meanwhile, expect subdued return on equity (ROE) over FY2022-23E and recovery to around 14-15 per cent over the medium term.
“We build a higher cost of equity of 16.5 per cent (from 15 per cent earlier) as the nature of problems and speed of resolution is unobservable from outside and hence involves elevated uncertainty. The bank is sufficiently capitalized (~25 per cent tier-1) to deal with higherthan-expected credit costs, but ROE recovery remains uncertain,” the brokerage said.
Emkay Global has trimmed its net profit/earnings per share (EPS) estimates by 6.7 per cent/8.5 per cent and 9.3 per cent/10 per cent for FY23 and FY24, respectively.