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

At a time when microfinance institutions (MFIs) are facing pressure on asset quality, and political instability in Assam that has a bearing on their collections, one wonders whether the initial public offering (IPO) of Suryoday Small Finance Bank (Suryoday SFB) has been timed well. The IPO is more to meet regulatory listing obligations. From that standpoint, 2.5x trailing 12-month price-to-book value appears expensive.

What makes the valuation more unattractive are asset quality issues at the bank. At 9.3 per cent proforma gross non-performing assets (NPAs) in the December quarter (Q3) (only 0.78 per cent recognised by the bank), Suryoday’s pool of bad loans is the highest among listed peers. While its proforma provision coverage ratio (or PCR) at 60 per cent fares better than that of Ujjivan SFB and Equitas SFB, there’s still the possibility of elevated provisioning.

Net interest income growth for the first nine months of FY21 was down by 2.2 per cent year-on-year and loan growth slowed to 12.5 per cent. Ther­e­fore, even if returns on assets and returns on equity — 1.2 per cent and 6.3 per cent — appear better than listed peers, their sustenance needs monitoring.
 

Analysts at Emkay Global say the bank’s MFI-dominant asset portfolio with rising risks due to asset quality shocks could pose uncertainties for growth and return ratios in the near to medium term.

As for positives, dependence on MFI loans fell to 71 per cent in Q3. Diversification in commercial vehicles, affordable housing, and small business loans in just about four years of obtaining SFB licence position it advantageously. Likewise, after the IPO, the bank’s capital adequacy is set to shoot up to 50 per cent — the highest among listed banks. Ample money in hand gives it adequate leeway to tide over asset quality issues.  The bank’s MFI loan concentration is largely in Maharashtra and Tamil Nadu (50 per cent of total). While this does pose a concentration risk, both states are mature MFI markets.

To sum up, Suryoday SFB offers some positives for investors, though under the present circumstances its asset quality challenges take precedence, making its valuation expensive for investors to consider the IPO.