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Analysis of Utkarsh Small Finance Bank's financial health and growth prospects as it prepares for its initial public offering. Key metrics, asset quality, and collection efficiency are examined.
Utkarsh Small Finance Bank, a four-year-old institution, is poised to enter the stock market with an upcoming IPO. While regulatory approval and valuation will influence investor interest, a close examination of the bank's performance metrics is crucial to assess its long-term potential.
Since its inception in FY18, Utkarsh Small Finance Bank has demonstrated a robust 44% compounded annual growth rate in its gross loan portfolio. The bank's origins as a microfinance institution have shaped its portfolio, with microcredit dominating. However, the bank is strategically focusing on diversifying its asset base, as stated in its IPO prospectus.
Like other financial institutions, the COVID-19 pandemic has impacted Utkarsh's growth trajectory. In the six months leading up to September, the lender's loan book experienced minimal expansion. This trend aligns with the performance of larger peers like AU Small Finance Bank Ltd and Equitas Small Finance Bank Ltd, which also reported modest growth during the same period.
Asset quality serves as a critical indicator of a financial institution's strength. Utkarsh Small Finance Bank has successfully reduced its gross non-performing assets (NPAs) to 0.71% as of March 2020, a significant improvement from 1.85% two years prior. While the NPA ratio stood at 0.64% in September 2020, this figure benefited from moratoriums and the judicial standstill on NPA recognition. The IPO prospectus revealed that approximately ₹26.9 crore worth of loans were not classified as NPAs due to the standstill.
The bank's collection efficiency, while improving, remains below pre-pandemic levels. As of September, Utkarsh was able to collect 79.28% of its dues, a decline from the 90-95% range observed before the pandemic. Despite this, Utkarsh boasts the lowest level of bad loans among its peers, according to the prospectus. The bank's strong track record in collections prior to the pandemic suggests the effectiveness of its collection processes and its likely to show faster improvement.
Utkarsh has benefited from the increased flow of public savings into bank deposits. The bank's deposits grew by 14% between April and September, with low-cost current account and savings account (CASA) deposits accounting for 14.46% of the total. While this percentage is lower compared to other banks, the exponential growth in low-cost deposits bodes well for the bank's future margins.
The stock prices of listed small finance banks have surged in recent months. Assuming the market exuberance continues, Utkarsh Small Finance Bank is well-positioned to capitalize on this favorable environment.
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