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

Ladies and gentlemen, good day, and welcome to Ujjivan Small Finance Bank Q1 FY '27 Earnings Conference Call hosted by Antique Stockbroking Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Manjith Nair from Antique Stockbroking Limited. Thank you, and over to you, sir.

Thank you. Good evening, everyone. I welcome you all to Q1 FY '27 Earnings Conference Call of Ujjivan Small Finance Bank. Today, we have the senior management team of Ujjivan Small Finance Bank represented by Carol Furtado, Executive Director; Sadananda Kamath, Chief Financial Officer; Ashish Goel, Chief Credit Officer; Vibhas Chandra, Head of Micro Banking; Hitendra Jha, Head of Retail Labilities; Umesh Arora, Head of Emerging Business; Martin P.S., Chief Operating Officer; Brajesh Cherian, Chief Risk Officer; Siddharth Bharadwaj, Head IR; and Mr. Gaurav Sah, Lead Investor Relations. With this, I now hand over the call to Carol Furtado, ED for her opening remarks. Thank you, and over to you, ma'am.

Thank you, Manjith. Good evening, and thank you all for joining us today for Ujjivan Small Finance Bank's Q1 FY '27 Earnings Call. Since our MD, Mr. Sanjeev Nautiyal is indisposed and not in office today, hence unable to attend this call. Please do note, I will be referring to year-on-year comparisons with Q1 FY '26 and quarter-on-quarter with Q4 FY '26. I will begin with a brief overview of the macroeconomic environment before discussing the bank's performance for the quarter. The geopolitical situation in West Asia, which started in Feb this year, continued to create uncertainty across global markets during the quarter. While discussions around the ceasefire emerged, the situation remains fluid. Softening of global energy prices from their peak, coupled with easing Indian commercial gas supply restrictions has smoothened commercial operations. On the local front, the weather-related uncertainties continue to pose risk due to strengthening of El Nino in the months ahead. We believe that harvest of rabi crops has led to better outcomes currently, but any delay in sowing of kharif crops might impact H2 economic activity. This remains a key monitorable. On the positive side, the high-frequency domestic economic indicators have largely shown stability. RBI in its June MPC review meeting decided to keep the policy repo rate unchanged at 5.25% while maintaining a neutral policy stance. The ForEx hedging cost dispensations by RBI have been a welcome step and should help in liquidity and hence stabilizing the deposit rates. While the real GDP growth for FY '27 was recalibrated to 6.6%, inflation forecast was within the band defined by RBI and is projected at 5.1% for full year. The governor also emphasized that the banking sector continues to remain resilient, supported by healthy credit demand, steady deposit mobilization and adequate liquidity to meet the productive requirements of the economy. Against this backdrop, the bank delivered another quarter of steady business growth. Our strategy continues to remain centered on strengthening our liability franchise, building a diversified asset portfolio and maintaining prudent risk management practices to ensure profitability along with growth. As part of plan for FY '27, bank has operationalized 38 new branches, taking total count to 814 as of June '26. We delivered highest Y-o-Y growth in deposits at 25% in the last couple of years, taking the deposit book to INR 48,129 crores. CASA deposits grew to INR 12,930 crores, up 37.8% year-on-year. In a tight liquidity scenario, we maintained comfortable CD ratio. To adjust for evolving market scenario, we effected rate increases in the month of June on key buckets in line with our intended ALM outcome. Our focus on enhancing the value proposition for deposit customers continues to deliver encouraging results. The high net worth program, Ivory, has witnessed strong momentum and is increasingly becoming an important pillar of our affluent banking franchise. Insurance cross-sell penetration has improved further, reflecting stronger customer engagement. The mutual fund distribution offering now accessible through mobile and Internet banking channels is seeing growing customer adoption. Additionally, the co-branded credit card currently in the testing phase is expected to further strengthen customer engagement and product penetration. Cost of funds continued the downward trajectory and stood at 6.86% for the quarter. We remain in sound liquidity health with liquidity coverage ratio around 132% for the quarter, reflecting a well-balanced approach towards growth and liquidity management. Turning to our asset franchise. We are pleased to note that our progress towards diversification of loan portfolio remains on track with more than half of the loan book being secured at 50.4% as of June '26. Following a strong performance last quarter, growth in our secured book has continued at robust rates and expanded to INR 21,638 crores, up 42.7% year-on-year and 7.8% quarter-on-quarter. The bank level gross loan book reached INR 42,903 crores, growing 28.9% year-on-year and 5.5% quarter-on-quarter. Disbursements for the quarter were at INR 9,245 crores, up 41.4% year-on-year. Driven by the sustained momentum in the micro banking sector, our micro banking book reached INR 21,371 crores, up 16.8% year-on-year, while disbursement grew by 16.4% year-on-year to reach INR 4,581 crores. On the asset quality front, bucket collection efficiency for the quarter stood at 99.68%, demonstrating a healthy portfolio. After seven quarters of degrowth, borrower base has started to grow, supported by 1.72 lakh new customer additions in Q1, marginally above the Q4 FY '26 numbers. Affordable housing and micro mortgages recorded strong growth with gross loan book increasing 40.8% year-on-year to INR 11,210 crores, underscoring resilient customer demand and effective execution across key markets. Affordable housing distributed through 581 branches and micro mortgages through 323 branches benefits from broad geographic dispersion and a well-defined state-wise collateral framework. Our disciplined underwriting approach supported by calibrated LTV and FOIR thresholds continues to reinforce portfolio quality while enabling sustainable growth. GNPA across affordable housing and micro mortgages remained stable at 1.2% and 0.6%, respectively. The MSME portfolio continued its strong momentum, registering growth of 54% year-on-year at INR 3,470 crores on the back of maintaining prudent underwriting standards. We have enhanced our product offerings within this segment. The working capital and supply chain finance jointly contribute around 28% in the MSME book. The business continues to help in customer diversification and increased deposit mobilization. The MSME PAR dropped 13 bps and new book GNPA remained stable at 0.5%. Gold loans continues to be strong growth driver with sourcing across 455 branches with an increase of 106 branches in the quarter. Gold gross loan book stood at INR 1,020 crores, up 248.6% year-on-year. This increased product penetration and tailored offerings resulted in disbursements growth of 183.9% year-on-year at INR 467 crores. Origination LTV for Q1 remained comfortable at 75%, while the book LTV remained around 56%. The vehicle loans with new two-wheeler segment continues to do well. This product is offered across locations catered by 337 branches with focus to enhance our mix of mid-premium and EV. The vehicle gross loan book stood at INR 1,036 crores, up 85.1% year-on-year. Portfolio quality remains steady with GNPA at 1.7%. Together, the new business lines of gold, vehicle and agri have contributed to 7% of the gross loan book, while the disbursement share was at 9% in Q1. Bank level asset quality continued to be stable during the quarter with GNPA reducing by 10 bps to 2.17%. Provision coverage ratio strengthened further to 85%, providing adequate coverage across secured and unsecured products. Collection efficiency for current due plus overdue remained healthy at 98.4%, supported by consistent execution across our operating network. Write-offs for the quarter stood at INR 72 crores. Credit costs came in at INR 127 crores. We are watchful of the macro environmental factors and will continue to take timely corrective steps to address any developments. The business growth witnessed across both our liability and asset franchise in Q1 translated into a healthy financial performance with profit after tax at INR 317 crores, resulting in ROA of 2.2% and ROE of 18.2%. Net interest income increased to INR 1,186 crores, while net interest margin remained stable at 8.5%. Processing fee and insurance cross-sell supported other income. Operating expenses remained well managed quarter-on-quarter, while personnel cost increase reflects salary increments effective from April 26, hiring and towards gratuity and leave encashments. The other expenses were lower sequentially on account of lower business generation expenses and lower CSR expenses. The strong performance across our asset products has more than offset the impact of macroeconomic headwinds and reinforced our confidence in achieving our FY '27 planned asset growth of 25%. The expenses planned this year for future capacity building has started kicking in from late Q1 and the effect would be seen over the remaining quarters. Capacity building expenses are of the nature of branch opening, branding and tech and analytics capabilities. This deferred commencement of expenses, coupled with ongoing efficiency gains will result in full year OpEx to be lower than earlier planned and now would be around 6.4% of average assets. We continue to witness encouraging trends in asset quality with credit cost at 0.9% with absolute slippages during the quarter remaining lower than anticipated. Accordingly, we are revising our FY '27 credit-cost guidance to 0.9% to 1% of average total assets. Please note, we are moving away from guiding credit cost on average gross loan book to average balance sheet for better alignment. We remain mindful of the prevailing funding rate environment and the continued competitive intensity in CASA mobilization, along with pricing pressures across key asset products and the resulting impact on margins. Taking these factors into consideration, along with the strength of our operating performance, improving asset quality and enhanced cost outlook, we are confident in raising our FY '27 ROA guidance to 1.8% to 2%. We continue to invest on creating more levers for liability customers to bank with us. Simultaneously, multiple digitalization and analytics-led interventions are being carried out to further bolster liability franchise. We are also utilizing the newly created capacities on ForEx side by offering attractive FCNR (B) rates. It is of paramount importance that capacity building continues to happen on all fronts. Highlighting a few new initiatives on assets front. Unsecured Fast Track loan has completed successful pilot and is ready for a scale-up. This is a pure digital product with the utilization of account aggregators and bureau details. Preowned cars has been piloted in Karnataka. It will be creating a growth engine within our vehicle loan business. Lending to mid-corporates has commenced with disbursements in Q1. The MSME product suite has been expanded with purchase invoice discounting. With that, I conclude my opening remarks and request the moderator to open the floor for questions. Thank you.

Thank you very much. We'll now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. [Operator Instructions] The first question is from the line of Renish from ICICI.

Congrats on a good set of numbers. Just two, three things, sir, one on the asset yield, right? So we are experiencing a very attended competition in segment like affordable housing or maybe financing. So how we are preparing ourselves from, let's say, speed-to-fire perspective to sustain these yields even if competition increases, right? So why I'm asking this is that since we are moving away from MFI business structurally and if you are not able to sustain yields in some of these new products, then on a steady-state basis, maintaining 2% ROA will be challenging. So just wanted to know your thoughts on the non-MFI yield today and how are we placed from a speed-to-fire perspective?

Renish, so I'll first address the affordable housing and then move to the overall yields. Yes, so on the affordable housing side, our markets are semi-urban, largely urban and semi-urban. We are not present in the metros. We would be present in a small way in the metros. So -- and we are present in about 580 to 590 branches. So that has given us a very robust distribution network to be able to maintain growth. And a INR 16 lakh to INR 20 lakh ticket size also is the right mix that we have found to maintain the yields that we desire. So we've been able to maintain yields. There is definitely some competitive pressure. And however, we feel confident that in the markets that we are, we should be able to maintain the yields.

Just on this affordable piece. So, let's say, even if you look at your internal rates, right, it has been hovering around 12.2%, 12.3% for the last maybe six, seven, eight quarters, right, which definitely suggests that the market environment is such that even if we want to increase the price, the market is not going to allow us. So -- and hence, my question is slightly from a medium-term perspective. Are you confident of sustaining these yields in this segment at this level? Or maybe we have to, let us say, revisit our strategy in terms of scaling micro mortgage more aggressively to maintain overall mortgage book yield?

No, I was talking about affordable housing being in the range of about 12.5% yield. And this is something you have to see the mix of ticket sizes and the geographies in which you operate. For us, the affordable housing, we've not had to compromise on yields because of the geographies and the ticket sizes that we've been operating in. There is a business line of micro mortgages, which we started around three years back. It is now about INR 1,800 crores. Here, the yields are much healthier. You're right, in the range of 19.5-odd percent. And here, again, about 70% of our business is semi-urban in nature. In the ticket sizes of about INR 10 lakhs to INR 15 lakhs, the average is about INR 7 lakhs, INR 8 lakhs in micro mortgages. Even if we go to INR 10 lakhs or INR 12 lakhs, the yield doesn't come down significantly. Again, as I said, it's a mix of ticket sizes and geographies.

Got it. Got it. Okay. And my second question is on the gold loan, right? So when we look at the customer sourcing mix, right, so this quarter, the new-to-bank customer has increased very sharply to 40%. So just wanted to know in 1 quarter, what has changed, which helped us acquiring a lot of customers from outside? Or it is just to do with the vintage of branch.

Hi, Renish. This is Vibhas. As far as gold loan is concerned, it is very -- it is a business which is very promising. At the same time, it is a new business to us. If you look at this quarter, we have activated more than 100 branches in gold loan, and that leads to new customer acquisition also. At the same time, we have seen that the demand in microfinance customers have also increased in Q1, leading to new customers from this segment also to come in. So these 2two factors combined has changed the numbers.

Got it. Got it. And any ballpark absolute number we have in our mind as far as gold loan book is concerned, let's say, 5,000 by '28 or any number would you want to find?

So, Renish, we are in the business -- in this business, we are looking at increasing capacities. And this is the consistent strategy we've been maintaining for the last two years, keep activating branches, keep enhancing capacity. This quarter, we've done on an average about INR 160 crores to INR 170 crores a month. The exit in June being INR 170 crores, INR 175 crores. So -- and we have a plan to take our active branches from about INR 430 crores, INR 440 to about INR 575 crores by the end of this year. So, we'll, again, significantly add capacities. The exit number for disbursement should be somewhere in the range of about INR 250-odd crores a month. We should be able to.

How much, sorry?

About INR 230 crores to INR 240 crores, INR 250 crores month exit March. This would actually result in the book getting increased.

The next question is from the line of Shreepal Doshi from Equirus.

Congrats on a good set of numbers. My first question was on the liability side. So there, we've seen cost of fund and cost of deposit coming down on a sequential basis on the -- but we've taken increase in the rates in some of the ticket size buckets. Now incrementally, do we expect the cost of fund to move up? Also, you highlighted in your commentary that the liquidity situation remains tight. So in that scenario, would we like see incrementally the cost of fund going up? And if yes, then to what extent are we expecting for the full year for that number to close?

Hi, Shreepal. Our deposit growth has been broadly aligned with the asset growth you would have seen. We also have some more avenues to support the funding, if at all required and to optimize the margin, which is -- we have the IBPC refinance, securitization options are also open for us. We remain cognizant of the fact there is a deposit pressure in the market. And those impacts are also being accounted for. That's been baked into our ROA guidance of 1.8 to 2 percentage. So that's been considered while we guiding the number of 1.8 to 2 percentage. We don't see a very significant increase, but marginal increase has been expected.

Got it. So undoubtedly, sir, we've done a commendable job despite the situation being tight on the deposit side. But -- so do you see any further rate hike requirement at our level in some of the buckets? Or now we are okay with the current rate hikes that we've taken in the 1Q?

As such, we don't see an immediate requirement for any upward revision. We will continue to remain at the same levels. And we will be watchful about how the market moves.

Got it. Sir, second question was on the vehicle finance portfolio. So we plan to add the preowned car segment within vehicle. Do we also plan to explore CV such as LCV, HCV in that category?

So, Shreepal, we have just completed the pilot for pre-owned cars. This is a business that we will test during the year in maybe two or three geographies and plan to scale up next year once we understand the customer segment better, the pricing and the local flavor of all the geographies that we are operating in. HCV and LCV, if we -- if and when we plan would be only after this financial year.

Got it. Sir, just one last question on the fee income side. This quarter, we have seen a dip in the insurance income. So what explains that? Incrementally also, should this be the run rate? Or will we see some bounce back there?

Hi, Shreepal. Hitendra, here. So what we have seen that our income has grown by almost 15% Y-o-Y, and we are hopeful to maintain same kind of growth rate as we go along from here.

Sir, from sequential, like from 4Q -- okay, so you mean to say on a -- alright, okay.

Shreepal, just to add, it all depends on the disbursal. So Q4 disbursal is all-time high, whereas Q1 is not comparable. That may explain the difference to you.

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

Congratulations on very strong set of numbers. So my question is on, if you can share the investment amount that you want to put for this capacity building, which is your branch opening, branding, tech and analytics. Because see, I'm looking at your current rate of profitability, which is INR 317 crores in the first quarter, wherein typically other income is also lower. And when I look at the guidance, you're implying INR 1,250-odd crores of profit at a 1.9% ROA. So then are we also trying to build in some NIM compression throughout the year, which is why we'll be remaining at the same rate of quarterly profits and adding up to INR 1,250-odd crores. So, if you can just tell us, firstly, the amount that you'll be spending on capacity building throughout the year and whether any NIM compression has been budgeted in the overall guidance of this current ROA.

Hi, Rajiv. Bala here. We already had informed you that we are planning to spend around INR 250 crores. Not much has been spent in Q1, which is why there is a good impact on upward in the profits. But definitely, the spending has started in June because it requires some planning. For example, in marketing, IT, we have worked on it opening branches, many branches opened in June. So it will build up in the coming quarters. That is why you can see that we have given you a guidance of 1.8% to 2%, which has considered the spend of this INR 250-odd crores in the coming quarters.

Yes. And on the NIM side, what is the budget in the ROE guidance?

NIM already, my colleague, CRO, Brajesh, just now explained on the cost of fund. So, on one side, the yield, you can see that the MFI is doing pretty well. So that will be helpful in keeping the yield up along with our higher -- some of our higher-yielding segments such as gold, two-wheeler, used car, micro mortgage. So that will sustain there. And already my colleague has explained that we don't see any major changes in the cost of fund going forward because we have various instruments such as IBPC, refinance, securitization, upward sleep, which we have not used in the first quarter, and we'll use it to keep it stable. So you can go ahead with the guidance of the NIM, which we already gave at the beginning of the year and which we have recorded in the first quarter.

Okay. Sure. And see, just on this funding of this very strong growth that we are delivering on the asset side, how are we looking at liability mobilization for funding such high level of growth? So from a distribution point of view, you explained that you'll be adding more branches. But in pricing also, I think we have done something on the pricing side as well. Anything from the productivity side that we plan to take some action so that we are able to get the required amount of deposits to fund this 25%, 30-odd percent growth that we plan?

Rajiv, Hitendra here. So there are two strategies. Number one, we are adding 144 branches this year. Out of that 38 already we have opened, 106 branches will open which will give us a distribution. Number two, from beginning, we have guided that our focus on liability side is in top 8 and top 30 markets, where we are seeing robust growth of roughly 75% Y-o-Y growth on CASA and overall 36% growth. So we'll continue to focus in this market, which has given us a good result, number one. Number two, we have introduced certain products, which is helping us to acquire good customers. And also, we are now more segment focused. We are not looking customer as one customer. We have different segments. We are focused on HNI segment. We are focused on NR. We are focused on task customers and also corporate salary. So this segmental focus, we are very confident with a new set of branches, we will be able to garner the deposit what we require. And also, we have FCNR opportunity, which has come up, okay, which will give us a good -- till now, we have done INR 60-odd crores in Q1 and are very hopeful to do this number, what we have guided earlier.

Okay. Okay. Just last thing. Can you share the current ROA profile of the affordable housing book, excluding micro mortgages? And how do we see the ROA of that portfolio shaping up in the coming year?

Hi. This is Gaurav. So, Rajiv, we are not looking to give any product level numbers. We'll come back to you once we plan to give, yes.

Thank you and best of luck.

The next question is from the line of Kaushik Agarwal from Haitong.

I have a couple of questions. So, firstly, on this guidance cut on the credit cost side. So what gives you the confidence in terms of cutting down this guidance? And broadly, if you can comment in terms of MFI portfolio, though we are seeing that broadly on the industry side, things are improving. But how is your portfolio performing? And owing to this uneven weather conditions, are you seeing any early warning signs in your portfolio? That is number one. Second question is on affordable housing. So the growth has been quite strong over there. So what is the management strategy in terms of the growth that we are seeing? And do you expect the momentum to continue? And second part of this question is in the micro mortgages in the par, there was some uptick on a sequential basis. So how should one read this? And lastly, on margins. So I saw that in your presentation, there is some like improvement in cost of fund despite that margins were largely stable. If you can help us understand what has really happened? And do you expect the cost of fund has largely bottomed -- because last quarter, you indicated that some part of the borrowings were supposed to be repriced in the upcoming quarter. Is it all done or something is still left over there?

Kaushik, I'll answer the question on microfinance first. So the credit cost is actually a function of the bucket collection efficiency. In Q1, we have seen 99.7% which is a very healthy collection efficiency. And last quarter also, we said that 99.7% is something that we are -- we find comfort in. The trends in July are remaining roughly the same. So therefore, we feel that this trend will continue. If there is a 5, 7 basis points increase or decrease, that would lead to a marginal increase or decrease in the credit cost. So that -- as long as this trend continues, our credit cost will remain largely under control. The second question was on affordable housing. The momentum, as we said, is basis the geographies that we are present in. We are largely into the urban and semi-urban geographies, very little presence in metros. And the ticket sizes and the yield that we have been maintaining has helped us grow this business. It is largely a distribution-driven business. Similarly, on the micro mortgages side, we are already present in about 325 branches. So as we go through the year, some of these branches will start to give a better efficiency. In terms of PAR, yes, there has been a marginal increase in PAR, but this business is only 2.5, 3 years old. It has still not started. The 18 MOB book is still very small. So as we go forward, there will be a natural increase in PAR. So that is how the micro mortgages book will mature over a period of time.

Okay. And on the margin piece, if you can answer that part as well.

Sir, we are not able to listen to you, Kaushik, sorry.

So, basically, I was asking that during this quarter, there has been some improvement in cost of funds and -- but the margins have largely remained stable. So what explains that? And second part is, like should one expect that cost of fund has largely bottomed because in the last quarter, you suggested that some of the book has to be repriced. So is it all done or some more further improvement in cost of fund can be expected?

Hi, Kaushik. From the repricing side, that benefit is almost -- we can't see further visibility on repricing benefit. We feel it would remain at the current level or slightly elevated. There is -- you know there is a pressure on the market. But we don't see significant changes to the current levels beyond a few bps here or there.

The next question is from the line of Abhishek from HSBC.

Congratulations for the quarter. So I just wanted to check in the MSME business, the ticket size is increasing quite steadily. Is this LAP or is this working capital? And what is the yield range on this business, higher ticket business that you are doing currently?

Abhishek, so this increase is a conscious strategy that we have that we started in quarter 1 of this year. And the increase in ticket sizes both on LAP as well as working capital. LAP, as you know, was about INR 58 lakhs to INR 60 lakhs. We are currently in the range of INR 80 lakhs to INR 90 lakhs. Similarly, on the working capital side, while we were in the range of INR 70 lakhs, INR 80 lakhs, we have now consciously taken it up to INR 1.1 crores to INR 1.2 crores. The yield, therefore, cannot be maintained at about 11%, 11.5%, which we used to do earlier. It would be somewhere in the range of 10.5%.

Okay. So the disbursement yield would be similar to the book yield or it would be lower than the book yield?

It would be lower than the book yield.

Yes. Because in the last three quarters, your book yield is also trending down and which coincides with the ticket size increase.

Yes, yes, yes.

Where does that stop? Like where do you draw the line and say, now we don't want to migrate further up the ticket size curve just to protect yield or hold it where it is?

So yield and OpEx are two variables that we are consciously monitoring. As the ticket size increases, the OpEx also comes down. It doesn't fully compensate the decrease in yield, but the OpEx plus the risk takes care of the trade cost. Both of them take care of the decrease in yield. So we feel that currently, we are in the range where we should continue for some more time. if there is any further increase in ticket size, probably it can be looked at next year. But this year, probably we'll be working in the same band.