Suryoday SFB IPO: Lender diversifies but asset quality worrying still

It was a purely microfinance bank in 2018, but dependence on such loans fell to 71 per cent in Q3

Suryoday Small Finance Bank’s initial public offering (IPO) opens March 17, launching at a time when the microfinance (MFI) sector is battling bad assets.

The IPO meets regulatory obligations for listing, but the bank’s 2.5x trailing 12-months price-to-book value appears expensive. The bank’s asset quality makes the valuation tricky. At 9.3 per cent proforma gross non-performing assets (NPA) in the December quarter (0.78 per cent recognised by the bank), Suryoday’s pool of bad loans is the highest among listed peers.

Suryoday’s proforma provision coverage ratio at 60 per cent fares better than Ujjivan SFB and Equitas SFB, which are at 56 per cent and 59 per cent, but that could change later. Net interest income growth in the first nine months of Financial Year 2020-2021 was down by 2.2 per cent year-on-year. Loan growth in this period slowed to 12.5 per cent. Suryoday’s return on assets (ROA) and return on equity (ROE)--at 1.2 per cent and 6.3 per cent--appear better than its listed peers Ujjivan SFB and Equitas SFB, but sustenance of the same needs monitoring.

Analysts at Emkay Global Services said the bank’s MFI-dominant asset portfolio could risk growth and return ratios in the near-to medium-term due to asset quality shocks.

There are positives: it was a purely MFI-based bank in 2018, but dependence on such loans fell to 71 per cent in Q3. The bank has diversified to commercial vehicles, affordable housing and small business loans in about four years of obtaining SFB license. Likewise, post the IPO, the bank’s capital adequacy is set to shoot to 50 per cent - highest among listed banks. Ample money in hand gives it adequate leeway to tide over asset quality issues and also set tall growth targets, once conditions turn favourable for the sector. The absence of holding company structure also eliminates any regulatory hurdles unlike the case with other SFBs.

The bank’s MFI concentration (50 per cent of total MFI loans) is largely around Maharashtra and Tamil Nadu. While this does pose a concentration risk, both states are mature MFI markets unlike eastern India and political risks have been kept under check over years.

Suryoday SFB offers positives, but if its asset quality challenges continue investors will take a hard look at the IPO.