Ujjivan Small Finance Bank Limited (UJJIVANSFB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '26 Ujjivan Small Finance Bank Analyst Conference Call hosted by JM Financial Institutional Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ajit Kumar from JM Financial Institutional Securities. Thank you, and over to you, sir.

Thank you. Good evening, everyone, I welcome you all to Q3 FY '26 earnings call for Ujjivan Small Finance Bank. . Today, we have the senior management team of Ujjivan Small Finance Bank represented by Mr. Sanjeev Nautiyal, MD and CEO; Carol Furtado, Executive Director; Mr. Sadananda Balakrishna Kamath, CFO; Mr. Ashish Goel, Chief Credit Officer; Mr. Vibhas Chandra, Head Micro Banking; Mr. Hitendra Jha, Head Retail Liabilities, TASC & TPP; Mr. Umesh Arora, Head Emerging Business; Mr. Martin PS, Chief Operating Officer; Mr. Brajesh Cherian, our Chief Risk Officer; Mr. Siddharth Bharadwaj, Head Investor Relations; and Mr. Gaurav Sah; Lead Investor Relations. I would like to thank the management for giving us the opportunity to host this call. I would like to hand over the call to Mr. Sanjeev Nautiyal for his opening remarks. Over to you, sir.

Good evening, everyone, and thank you for joining us today for Ujjivan's Q3 and 9 Months Financial Year '26 Earnings Call. On behalf of the entire Ujjivan team, I would like to extend our warm wishes for the new year. Please note, references will be made to Q3 '26 versus Q3 '25 as Y-o-Y, and Q3 '26 versus Q2 '26 as Q-o-Q. The operating environment remains favorable as reflected in real GDP...

Sorry to interrupt, sir. Could you please come a little closer to the microphone. Your voice is just a bit muffled.

The operating environment remains favorable as -- is this better, please?

Yes, sir, slightly better. Please go ahead.

Okay. The operating environment remains favorable as reflected in real GDP growth print of 8.2% in quarter 2 of financial year '26. This marks the fastest pace of expansion over the last 18 months with financial year '26 growth expectation at 7.3%. This underscores the continued strength in domestic demand alongside improving industrial and manufacturing capacity utilization supported by healthier corporate revenues. For the banking sector, these strong macro fundamentals translate into supportive backdrop for sustained demand for credit as well as improving asset quality. The RBI, MPC rate reduction of 25 basis points in December lends further impetus to future growth prospects. We look forward to the union budget to continue the path of fiscal consolidation while boosting key pillars of GDP growth. Coming to our quarterly performance, we have delivered yet another stellar quarter on the overall business. Deposits grew by a strong 7.7% Q-o-Q and 22.4% Y-o-Y to INR 42,223 crores with our credit-to-deposit ratio staying comfortable at 88%. CASA mobilization has been healthy and remains a key focus area for us. In line with our guidance, we continue to expand our geographic footprint during the quarter with the addition of 11 branches, taking our total branch network to 777. This marks completion of planned addition of 24 branches for financial year '26. The clear focus on acquiring quality new-to-bank customers and dedicated channels to engage better with existing to bank customers has led to CASA percentage staying above 27% for 2 consecutive quarters. We have witnessed improvements both on month-end balances and monthly average balances. With the planned enhanced engagements with CASA customers, we are poised to better this ratio. Cost of funds continued to trend lower due to the deposit rate cuts already taken in H1 FY '26 and better overall liquidity planning. Cost of funds for the quarter was 7.08%, down 26 bps Q-o-Q. We are closely monitoring the tight liquidity scenario and remain comfortably placed with LCR at 165.6% as of December '25. Effective January 9, savings account deposit rates in the lowest 2 brackets have been reduced by 25 basis points and 50 basis points, respectively. Gross loan book, GLB, for the quarter grew by 7.1% Q-o-Q and 21.6% Y-o-Y to INR 37,057 crores, driven by the highest ever quarterly disbursements at INR 8,293 crores. This was due to all-round performance across unsecured and secured products. Our micro banking portfolio continued to demonstrate strong momentum across collections and disbursement growth. Bucket X Collection Efficiency showed continued improvement for 7 consecutive months starting June 2025 and clocked 99.7% for December '25. The book created with enhanced credit policies within MFIN Guardrails is leading to these improved collections. The rejections trend has started to move lower, and we expect further improvement in new customer acquisition going ahead. New customer additions were at 1.4 lakhs, up 11% Q-o-Q. Disbursements in micro banking were at INR 4,688 crores, up 10% Q-o-Q and 62.4 percentages Y-o-Y, led by improving market sentiments. Group loans, GLV grew 0.2 percentages Y-o-Y after a 5-quarter contraction. GL continued to witness increase in ticket sizes in line with larger market trend. Individual loans disbursement continued to grow steadily on back of graduating customers from GL. GLB came in at INR 5,687 crores, growing 4.1 percentages Q-o-Q and 14.8 percentages Y-o-Y. Coming to our secured portfolio, growth in the secured book continues to stay aligned with our long-term objective of increasing its share in the overall loan book now reaching 48 percentages. Housing portfolio comprising of affordable housing and micro mortgages delivered strong growth of 49.6 percentages Y-o-Y. Affordable housing GLV grew by a healthy 40.3 percentages Y-o-Y to INR 8,231 crores. This was supplemented by micro mortgage book, which more than doubled to over INR 1,329 crores Y-o-Y. Asset quality trends continue to be along expected lines with PAR improving sequentially to 3.3 percentages and GNPA remaining flat at 1.1 percentages. Housing loan portfolio represents a mature business that we have built steadily over the last 9-plus years. This book represents an important growth engine for the bank. Our focus has been on scaling this franchise in a calibrated and sustainable manner, leveraging our distribution strengths. MSME GLB witnessed a robust growth of 69.1% Y-o-Y at INR 2,865 crores, driven by disbursement growth of 37.4% Y-o-Y to INR 457 crores. Asset quality continued to improve with GNPA as of December '25 at 4.1 percentages with new book showing negligible delinquency. As the working capital business grows, the liabilities cross-sell continues to expand. The relatively new gold loans business has scaled up roughly fivefold Y-o-Y to INR 557 crores. Disbursement capacity continues to expand with the product now being offered in 349 branches, leading to INR 100 crore disbursement month-on-month. With book LTV below 60% as of December '25, portfolio is resilient to any abrupt shocks arising from underlying gold price movement. Agri loans now constitute 3.4% of the overall secured portfolio. The GLB has scaled sharply by 212 percentages Y-o-Y to INR 607 crores, supported by strong disbursement of INR 125 crores in Q3. Vehicle loans, the steadily increasing new 2-wheeler book is high yielding at around 20%. Growth in the vehicle finance portfolio was driven on the back of the festivities in Q3, witnessing a robust growth of 120% Y-o-Y, reaching INR 823 crores with GNPA at [ 1 ] percentages. FIG book has grown 6.9% Q-o-Q and 17.9 percentages Y-o-Y and continues to create opportunities for the bank across both assets and liability products. We will introduce our mid-corporate offerings in Q4 '26, which will expand the product suite. AD-1 business has commenced in November '26. At present, we offer FCNR, EEFC and account payments for our customers. We are in the process of starting our trade build-out to handle FX bills, LCs and BGs. Coming to bank level asset quality, PAR for the bank came below 4%. This was 5.36 percentages as of December '24. SME book continued the positive momentum and came in at 1.6 percentages. As anticipated, slippages and write-offs have moderated to INR 221 crores and INR 126 crores, respectively, in Q3. GNPA came in at 2.4 percentages as of December '25. Credit cost for the quarter, including INR 9 crores of accelerated provision came in at INR 195 crores. PCR moved up to 76%, up 3% Q-o-Q, reflecting positive signs in provision requirement in Q3, which is expected to see further reduction in Q4. This is along guided lines. On the margin side, net interest margin for the quarter was sequentially higher at 8.2 percentages, supported by lower cost of funds, favorable product mix, lower interest receivable and unsecured portfolio, coupled with CRR relaxation. Our reported net interest income of INR 1,000 crores is a growth of 12.8% Y-o-Y and 8.5% Q-o-Q. This marks the highest ever reported NII, reflecting our growth as well as normalization in P&L post the recent stress period. As regards the implementation of new labor code effective November 25, we have assessed and accounted for the estimated incremental impact towards past service cost amounting to pretax INR 18 crores. Our cost-to-income ratio came in flat Q-o-Q at 66 percentages. Adjusted for this INR 18 crore one-off impact to our cost of income drops below 65 percentages. Profit after tax came in at INR 186 crores with an ROA of 1.5% and ROE of 11.5%, indicating strong improvement in profitability. The improved profitability is on expected lines and is built into FY '26 guidance range. On our universal bank application being considered by the regulator, we continue to remain hopeful. To bolster the Board, we welcome Mr. Aniruddha Paul to the Ujjivan family. He has been appointed as an Independent Director effective today, subject to the approval of the shareholders. He is an award-winning business and technology leader with over 3 decades of global experience across banking, insurance, technology and digital transformation. He brings expertise in complex transformation, innovation in AI and data, process and technology that will help the bank in its growth trajectory. As I conclude, I want to reiterate that the broad-based improvements delivered in quarter 3 across key operating metrics are durable and reflective of disciplined execution, keeping in sight our long-term vision. While we grow our various businesses, we are managing our expenses in a very tight band and which should see our investments in distribution, process, technology, digital and marketing, creating an operating leverage over the medium term. As we close in on the end of the financial year, our teams are working on the annual operating plan for financial year '27. We shall continue to generate growth momentum across deposits and asset products into the new financial year. Asset book diversification shall continue while improving asset quality. Cost of funds is expected to trend better, leading to improved performance across parameters. I will pause here and open the floor for questions. We have our ED, CFO and other colleagues who will collectively answer the audience's questions. I now hand over to [indiscernible]. Thank you so much.

[Operator Instructions] Our first question comes from the line of Rajiv Mehta from Yes Securities.

Congratulations on very strong performance. Sir, my first question is on the status of Universal Banking license, while you remain hopeful about it. But has there been any communication or any kind of pushback as per -- in the recent time and which implies that the approval is -- will come with some delay or which explains why it is taking so much time because it will be about 12 months since we have applied. So if there is anything like that or you think that it's a normal time and we are absolutely very near the point where the application will get a decisive decision from RBI?

So Rajiv, it is being actively considered by the Reserve Bank of India. And we have to just wait for their decision. I mean that's all I can say. We would expect it to happen as quickly as possible. The decision that is.

Okay. And sir, now just commenting -- if you can comment on the NIM trajectory because NIM has pleasantly gone up by 30 basis points sequentially in this quarter. Now incrementally, when I look at your cost of term deposits, it was just the first quarter wherein we have started the fall happening by 40 basis points. Now if you can explain the trajectory of how your cost of term deposits can further fall and up to what level? And you've also cut some SA rates. So how would that also have some positive impact on the cost of fund? And now with the growth mix slightly getting better with MFI coming back, how do you see the yield playing out? And consequently, as a dynamics of both asset and liability pricing, how do you look at your NIMs over the next 2, 3 quarters?

So Rajiv, we expect the NIM to at least stay at the same level as we have reported in this quarter. Possibilities for improvement do exist. And the kind of initiatives that we have taken on the reduction of the rates of interest, savings bank deposit rates in the lower -- lowest 2 buckets by 25 basis points and 50 basis points and the tightening of the costs and the expenses and the kind of portfolio health that we are witnessing on the microfinance side and the growth that it is exhibiting all points into a positive direction. So let the actual action happen in the last quarter, we remain positive.

Okay. Sir, just 2 last things. Sir, where do you want to maintain the...

Sorry to interrupt, Rajiv. I would request you to rejoin the queue as you've done with 2 questions. The next question comes from the line of Suraj Das from Sundaram Mutual Funds.

Two questions. One on the yield on MFI. This quarter, the yield on MFI has gone up on a Q-o-Q basis. Just wanted to check if this is a function of the lower slippages or you have taken any rate hike or done some sort of that thing there? That is question one. Second question, sir, in terms of this individual PAR 0 number on the West Bengal side, I think that number has been quite sticky for last 2, 3 quarters. When do you see improvement there? And the last question would be, sir, on the affordable housing book. I think in terms of PCR on the housing portfolio has come down quite a bit. I mean, over the last 3, 4 quarters, it used to be 60% plus 60%, 65%. However, I think that number right now is mid-40s. So what would be your comfortable level of PCR in the housing portfolio as this is one of the fastest-growing portfolio within the bank?

Suraj, on the first question, which was 22.2% yield, the bank has not taken any changes in the rate -- the lending rates. It is only on account of reduced slippages and therefore, consequently reduced interest reversals. The second question was related to individual loans, which West Bengal, we had pointed out last time, was showing a higher par. So when you look at the SMA book, the SMA book has started to come down. Our bucket X Collection Efficiency in West Bengal has also improved. So SMA has come down. However, 90-plus continues to be slightly on the higher side. And on housing, the PCR is 55%. I don't think it is lower than that. Yes, it is -- so last time also, we had said that on almost all secured assets, our PCR is about 55%. And on unsecured, our PCR is in the range of 85%, bringing the overall PCR to 75%, 76%. That continues even in the end of this quarter.

The next question comes from the line of Shreepal Doshi from Equirus Capital.

Congrats on a good quarter. Sir, my question was on MFI segment. So what is the customer base there as on December? And how has been the customer addition in the last couple of quarters? Just wanted to understand that. 5And then to follow up there, what is the kind of rejection rate that we have seen in this segment for the new customers, given the kind of guardrails that are prevalent for MFI lenders? So that is question number one. And question number two was on the OpEx front. So that run rate continues to be elevated. So while we've been adding branches there and also for, I think, the new product -- the infrastructure, but will the run rate come down? Or will it remain elevated despite the CI ratio looking better?

Shreepal, answering to your first question. NCA is something which is a question in our industry in the last 1 year after the crisis, how NDA moves will also decide that how your borrower base -- overall borrower base increase in the industry. This year has been good for us. We started this year in the first quarter with close to 1.08 lakh new customer acquisition. Q2 was close to 1.24 and Q3 is at about 1.4. So there has been consistent improvement every quarter in terms of new customer acquisition. And we see that in next quarter also, we'll see -- we'll see improvement in new customer acquisition. The reason behind that is that if you look at -- you also asked about rejection rates. And the rejection rate, obviously, after implementation of Guardrail 2.0, it went up and it went up to 46%, 47%. And if you look at our number now, our percentage of customers who are pre lender or above has come down to 2.4%, close to 2.5%, which was close to 14%, 15% at peak. As the percentage have moved down, our rejections have also come down to about 35%, 36%. And we expect this number to be there going forward.

Got it. And sir, what is the common reason of rejection? Is it just the lender cap or anything else?

It is a mix. It is also a Guardrail 2.0, which is lender cap as well as overall indebtness. At the same time, the other reason is customer repayment behavior with us and others.

Got it. And sir, what -- on the same question on the OpEx side?

Shreepal, Bala here. I'll comment to your question on OpEx. Can you hear me?

Yes sir I can hear you.

Coming to your question on OpEx, 6.7% was OpEx to asset ratio this quarter, which was higher by 40 bps. But it is lower than our internal plan. This was very much envisaged by us. And the increase is due to 2 factors. One is you are aware the gratuity, we had to take a higher provision of around INR 18 crores due to the new labor code that had an impact of 10 bps. And the balance is mainly due to the business growth, which we factored in. You know, our disbursal was at an all-time high. So it is towards that. Q4 also will stay around same level. That's what we are more or less anticipating...

So Q4 also, we should see 6.7% sort of a cost to it? Is it?

Yes. Next year, we should see an improvement. But this year, it will be at the same level. And this is what we have planned also in our budget for the year.

The next question comes from the line of Ashlesh Sonje from Kotak Securities.

Two questions from my side. Firstly, if you can talk us through the loan mix, which you envisage over the next year or so? How fast do you expect the share of MFI to decline? Or do you expect it to stabilize around current levels? That is one. Secondly, if you can just summarize the rate cuts, which you have taken on SA again. I missed the numbers. And if you can also spell out what is the expect on the cost of SA you expect over the next quarter?

Coming to your first question, we are working on our budget for next year along with the medium-term plan. Once it is concluded, we'll share the details with you. Till then, we remain committed to a vision 2030. We have given all the details that you may refer to that.

This quarter, we have reduced our SA in 2 buckets, 0 to 1 lakh by 25 bps, and 1 to 5 lakh for 50 bps. Overall, 46% of deposit lies here, SA deposit in these 2 buckets. So right now, we are expecting rate -- I mean, cost of fund around 7% or so.

For the cost of fund side, 7% for next quarter?

Yes. Overall, and right now 5%, 5.2%. So some moderation will happen, around 5 bps max.

Also, I wanted to add that the exit cost of fund by the year-end would be around 7%.

The next question comes from the line of Deepak Poddar from Sapphire Capital.

Sir, just first up, I wanted to understand, I think you mentioned in your opening remarks as that you expect a further moderation in the credit cost. And you did mention in your presentation as well our steady-state credit cost of 1 to 1.5x. So just wanted to understand by when we do expect the steady-state credit cost we strive to achieve, I mean, maybe what we are 2 quarters away, 4 quarters away, how should one look at it?

So Deepak, credit cost for us when we had guided, we said that credit cost in H2 will be significantly better, and we will start seeing a lower trajectory. As expected, Q3 has shown a very good improvement over Q2 and Q4 also will show an improvement over Q3. In terms of normalization of credit cost, we can expect that next year, the normalization should happen. There will be some amount of stock available probably in the later buckets, which should get absorbed in -- which should get provided in Q1, I would say. So we could say that we are about 2 quarters away.

So ideally, we can say by second half of FY '27, one can expect a normalization of your credit cost rate? That would be a fair assumption?

Yes, we are in the process. The normalization has started, and normalization of credit cost happens with a lack of NPA recognition. So that process has already started in Q3. And I would say that by the end of Q1 and Q2, we should see the normalization of credit costs.

So I missed that. By end of what?

By end of Q1 and definitely by end of Q2.

By end of first half, right?

That's right.

Okay. Okay. And my second question is on your ROA. I mean we have given our FY '30 vision where we are seeing ROA of 1.8% to 2%, right? And I think currently only at a not normalized credit cost, we are at an ROA of 1.5%. So you expect this ROA profile of the company because we are going more towards secured book to be limited to that below 2% kind of a range. Because once you get that -- I mean, currently, your credit cost in the range of 2.1%. So on an average, a steady, steady state credit cost of 1% to 1.5% will give you a delta of around 0.5% to 1%, right? So -- but still, we are talking about ROA of 1.8% to 2%. So just wanted to pick your brain. I mean, how do you think on it?

We are going to have a diversified book. And as shared in our plan for 2030, we have worked out the entire plan. And definitely, it is coming to the range what you mentioned. Yes. So with the book which we envisage with more of secured and unsecured tapering off to 30% by 2030, this plan can be achieved.

Okay. And what is the assumption of secured book by FY 2030?

2030, we are assuming around 30% to 35% will be unsecured and the balance will be secured.

So 65%, 70% is secured and there we expect a 1% to 2% kind of ROA profile?

Yes. This year, we'll end around 50-50. Slowly, it will progress towards 30-70 by 2030. Every year, around 5%.

The next question comes from the line of Sucrit Patil from Eyesight Fintrade.

I have 2 questions. My first question is, as Ujjivan builds on its core in microfinance and affordable housing, how do you see the lending mix shifting over the next 2 to 3 years? And what role will digital onboarding and fintech partnerships play in scaling inclusion and strengthening customer support? That's my first question. I'll ask my second question after this.

So while we have given the overall guidance up to financial year 2030 in terms of the various components and building blocks of business that we will have, we are revisiting the issue and preparing a 3-year strategy to further fine-tune it. So may I request you to please wait till we finalize our 3-year plan and then come up to you with a specific iteration. So I would request you to just wait for some more -- for this quarter, we'll be able to come back to you with greater details.

Fine. My second question is with strong capital adequacy and improving asset quality, how are you planning to sustain margins and cost efficiency as deposits and secured lending expand? And how do you see digital cost efficiency shaping ROA and long-term profitability in the coming quarters?

This is Gaurav. So with the improvement in the overall parameters across the unsecured landscape, we have started to see the credit cost moderation and that is leading to the increased profitability. And the diversification, if you see the secured verticals, the new businesses that we had started to incubate around FY '25 starting, they started to grow very well. So they'll soon add into the bottom line as well. We have trajectory for that. And hence, the overall profitability will move in the tandem of, as Mr. Nautiyal also said towards the FY '30 vision. So that's the overall thing that we are looking at. And on the liability front also, just to add, we are looking to increase the CASA percentages, which has come up to 27% in this financial year. We expect that to move towards 35% in our '30 vision. So all these things will play out, and we look to have a consistent kind of a profitability metrics.

Just to add here, our CASA franchise is seeing very good growth. This year, we saw growth of 33.2% Y-o-Y and 7% Q-on-Q. So we are confident of increasing CASA percentage going forward.

The next question comes from the line of Rajiv Mehta from Yes Securities.

My question was on this -- on the collection team, I see some reduction in the collection team starting to happen in this quarter. And now with normalized collection efficiencies across businesses, including microfinance, do you think -- what is the scope for optimizing this number too? So that's the number one question. And second is on the affordable housing disbursement. I can see some mild deceleration in this quarter on a Q-on-Q basis. And I can also see that in affordable housing, there's a 20 bps of yield decline on a Q-on-Q basis. So any growth or pricing or competitive challenges in that particular segment because that's a material segment for us.

So Rajiv, on the collection team, as you know that we've had 4 quarters of increased slippages and increased PAR, which is now coming under control, and we are now starting to show very good numbers on par as well as NPA. However, the entire stress has been in the microfinance book. So on micro banking, there is a long tail, which we already have. So we expect that in Q4, there will be no meaningful decline in the number of people in the manpower. But Q1 onwards, we will start to see a decline of between 100 to 150 people on a quarter-to-quarter basis. On affordable housing, see, we've moved towards INR 15 lakh of average ticket size. So the decline in yield that you're seeing is largely because there has been a shift towards slightly higher ticket sizes, point number one. And point number two, there has also been increased competitive intensity in the market. And there is, of course, Rajiv, something that I missed pointing out was a repo cut, which got passed on to customers that also had an impact. So the 20 basis points reduction is a factor of these 3 things.