IPO: ESAF Small Finance Bank

In a nutshell Quality: It reported a three-year average ROE of 10.8 per cent. Moreover, it achieved an average net interest margin of 9.4 per cent in the last three financial years. Growth: Over the last three years, it grew its AUM (assets under management) by 39.2 per cent annually and its PAT by 69.4 per cent annually. Valuation: The stock will be priced at a P/E and P/B of 9.5 and 1.4 times, respectively, compared to its peers' median and average of 14.1 and 2.2 times. Overview: Rural areas are not only relatively less competitive but also have higher growth potential due to lower penetration. As of March 31, 2023, rural centres, which accounted for 47 per cent of GDP, received just 8 per cent of the overall banking credit, which shows the vast market opportunity for banks and NBFCs to lend in these areas. The company aims to gain from this opportunity. About ESAF Small Finance Bank ESAF Small Finance Bank is an SFB with a focus on rural and semi-urban centres. As of June 30, 2023, its gross advances to its customers in rural and semi-urban centres (combined) accounted for 63 per cent of its gross advances, and 72 per cent of its banking outlets were located in rural and semi-urban centres (combined). Its advances comprise of (a) microloans, which comprise microfinance loans and other microloans; (b) retail loans, which include gold loans, mortgages, personal loans, and vehicle loans; (c) MSME loans; (d) loans to financial institutions; and (e) agricultural loans. Strengths of ESAF Small Finance Bank A higher share of retail deposits: ESAF SFB had the highest retail deposits(low-cost funds) as a percentage of total deposits at 89 per cent as of June 30, 2023, in comparison to its peers. Strong capital adequacy ratio (CAR): It maintained a CAR of 20.6 per cent as of June 30, 2023, against the regulatory requirement of 15 per cent. Weaknesses of ESAF Small Finance Bank Rising competition: While the rural segment has been relatively less competitive, In recent years, there has been a significant rise in small finance banks catering to these areas. Besides, big banks such as HDFC Bank have also been actively opening branches in tier-3 and tier-4 cities. Rising competitive environments could pose a threat to the company's growth going forward. It caters majorly to the unsecured category : As of June 30, 2023, 75 per cent of its advances (net of provisions) were unsecured advances. Microfinance, in general, is a risky segment and can quickly go south if there is any adverse event. During the pandemic, NPAs in small finance banks shot up significantly due to the nature of the borrowers they cater to. IPO details Total IPO size (Rs cr) 463 Offer for sale (Rs cr) 72.3 Fresh issue (Rs cr) 390.7 Price band (Rs) 57-60