IPO: Capital Small Finance Bank

Capital Small Finance Bank (or Capital SFB) is coming out with its IPO (initial public offering) on February 7, 2024. Here's a breakdown of the bank's strengths, weaknesses, and growth prospects to help investors make an informed decision. In a nutshell Quality: The bank reported a three-year average ROE of 13.0 per cent between FY21 and FY23. Moreover, it achieved an average net interest margin of 3.8 per cent in the last three financial years. Growth: Over the last three years, the bank grew its advances by 20.7 per cent and PAT by 51.5 per cent per annum between FY21 and FY23. Valuation: The stock will be priced at a P/E and P/B of 19.7 and 1.8 times, respectively. Overview: The surge in business activities and consumption has fueled the growth in India's banking sector. Capital Small Finance Bank is looking to capitalise on the growing industry, especially in the underpenetrated semi-urban and rural areas. However, an increase in competition from existing small finance banks and NBFCs, along with the entry of new fintech players, may pose hurdles to the bank's prospects. About Capital Small Finance Bank Incorporated in 1999, Capital SFB is one of the two non-NBFCs (non-banking finance companies) to receive the small finance bank licence in 2015. The bank operates through 173 branches across five states and one union territory. However, Punjab has the highest branch count of 149, contributing 84 per cent of the total advances and 94 per cent of total deposits as of September 2023. Agriculture loans comprise the majority of advances with a share of 39 per cent, followed by 26 per cent in mortgages and 20 per cent in MSME loans, as of September 2023. Strengths of Capital Small Finance Bank Retail concentration in deposits - The share of retail deposits in total deposits was 93.6 per cent as of September 30, 2023. This share has been consistently over 90 per cent in the last three years. Secured portfolio - As of September 30, 2023, nearly all the loans (99.9 per cent) were backed by security, and most of these (84.3 per cent) were secured with immovable property. Weaknesses of Capital Small Finance Bank Geographical concentration - Despite its presence in multiple states, the bank remains a Punjab-concentrated entity. Ninety-four per cent of deposits and 84 per cent of advances come from Punjab-based branches as of September 2023. Further, nearly 40 per cent of its total branches are in Jalandhar. Consequently, the bank's performance is highly susceptible to any adverse natural or economic events in the state. Inadequate provision coverage ratio (PCR) compared to peers - The bank's PCR for the last three financial years (FY23, FY22 and FY21) was 51.5, 46.0 and 46.1 per cent, respectively. High competition - The bank operates in a competitive environment with NBFCs, banks, fintechs, and other SFBs (small finance banks) trying to attract borrowers from semi-urban and rural areas. IPO details Total IPO size (Rs cr) 523 Offer for sale (Rs cr) 73 Fresh issue (Rs cr) 450 Price band (Rs) 445-468 Subscription dates February 7- 9, 2024 Purpose of issue Improving Tier 1 capital base to meet future capital requirements and expanding the branch network Post-IPO M-cap (Rs cr) 2108 Net worth (Rs cr) 1162 Promoter holding (%) 18.8 Price/earnings ratio (P/E) 19.72 Price/book ratio (P/B) 1.8 Financial history Key financials 2Y CAGR