Equitas, Ujjivan small finance banks: Long-standing demand may soon be met

Recommendation on collapsing the holding company could simplify the structure and help reduce promoter stake in the banks

After two years of multiple representations and listing their small finance bank (SFB) arms, there could be some respite for Equitas and Ujjivan — their SFBs and holding companies. With the Mohanty Committee on Friday (post market hours) recommending that a holding company (holdco) model need not be mandatory for all banks, the two SFB stocks rose sharply in Monday’s trade, up 12-20 per cent. They may gain on two counts, should the committee’s recommendation be approved.

First, this allows for a collapse of the holdco and SFB, though analysts at Kotak Institutional Equities say the process could still require these banks making an application to the regulator. Second, if the walls are brought down, that by itself could result in the promoter stakes falling to some extent from the present 80 per cent-plus mark in both banks. In one stroke, two of the SFBs’ major pain points may be eased.

But beyond this technical aspect, what next? Stock prices of Equitas SFB (Rs 37.35 a share) trails Ujjivan SFB (Rs 40 a share). In terms of valuations, the gap between the two is relatively wide — 1.3x FY21 estimated book for Equitas SFB and 1.9x FY21 estimated book for the latter. Ujjivan SFB’s superior valuations is because of its better asset quality. In the September quarter (Q2), at 0.1 per cent net non-performing assets (NPA) ratio, Ujjivan beat Equitas’ 1.03 per cent. However, without a faster diversification of the book, Ujjivan SFB stock may lose its sheen, say analysts at Emkay Global Financial Services.

“The bank’s long-term prospects hinge on ramping up its liability pool and asset-side product diversification away from micro finance (MFI) book,” they note.

Analysts at Nomura also make a similar observation. They believe Equitas SFB may be out of the woods, but not so with Ujjivan SFB. Equitas’ widely dispersed book — least MFI concentrated (26 per cent of overall loans) — positions the banks at an advantage. Diversification into vehicle finance, small business loans, and housing loans has helped its overall efficiency rebound to over 94 per cent in Q2. Ujjivan SFB drawing 75 per cent strength from MFI loans, has seen a slower rebound. Collection efficiency improved to 86 per cent in Q2, while stressed MFI pockets such as Maharashtra, West Bengal, Punjab, and Assam may be the grey areas. As Ujjivan ramps up diversification, the table may turn in favour of Equitas and the valuation gap between the stocks may eventually narrow.