IPO: Utkarsh Small Finance Bank

In a nutshell Quality: Utkarsh Small Finance Bank's three-year average ROE of 12.3 per cent. Additionally, it has reported a healthy three-year average net interest margin (NIM) of 8.8 per cent. Growth: Over the past three years, the bank has achieved growth in net interest income (NII), deposits, and advances, with annual growth rates of 35 per cent, 26 per cent, and 35 per cent, respectively. Valuation: The stock is expected to be listed at a lower valuation compared to its peers, as indicated by its P/E and P/B ratios. Overview: Utkarsh Small Finance Bank stands to benefit from the increasing demand for credit, rising income levels, and growing business activities in rural and semi-urban areas. However, the bank faces intense competition in the industry and potential risks associated with the possibility of economic downturns and an increase in non-performing assets (NPAs). About Utkarsh Small Finance Bank Utkarsh Small Finance Bank was established on April 30, 2016, as a wholly-owned subsidiary of Utkarsh CoreInvest Limited. The bank operates across 26 states and union territories of India, with a total of 830 branches. As of March 31, 2023, the micro-banking segment accounted for 66 per cent of the bank's gross loan portfolio. Strengths of Utkarsh Small Finance Bank The bank has experienced robust growth in total deposits and CASA (current account and savings account) deposits over the past three years. This has helped lower the cost of funds from 8.27 per cent in FY21 to 6.96 per cent in FY23. As of March 31, 2023, the bank reported a strong liquidity position with an LCR (liquidity coverage ratio) of 357.8 per cent, surpassing the regulatory requirement of 90 per cent. Weaknesses of Utkarsh Small Finance Bank More than 55 per cent of the gross loan portfolio is concentrated in Bihar and Uttar Pradesh. Any economic slowdown, downturn, or natural calamity in these regions could significantly impact loan recovery and the bank's net interest income. The bank's top 20 depositors accounted for over 20 per cent of the total deposits in FY23. The loss of any of these customers would result in reduced deposits and increase the bank's exposure to funding risks. Unsecured loans, including micro banking loans and certain retail loans, make up 66.9 per cent of the bank's total loan portfolio. Unsecured loans carry higher credit risk and have a lower probability of recovery in the event of default. IPO details Total IPO size (₹ cr) 500 Offer for sale (₹ cr) 0 Fresh issue (₹ cr) 500 Price band (₹) 23-25 Subscription dates July 12-14, 2023 Purpose of issue Mandatory listing. Proceeds will be used to augment Tier-I capital. Post-IPO M-cap (₹ cr) 2,740 Net worth (₹ cr) 2,500 Promoter holding (%) 69.3 Price/earnings ratio (P/E) 6.8 Price/book ratio (P/B) 1.1 Key financials 2Y growth (% pa) FY23 FY22 FY21 NII (₹ cr) 35 1,529 1,061 839 PAT (₹ cr) 90.2 405 61 112