IPO: Jana Small Finance Bank

Jana Small Finance Bank came 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 8.3 per cent and achieved an average net interest margin of 7.8 per cent during FY21-23.
  
• Growth: During FY21-23, its assets under management (AUM) grew by 25.5 per cent and profit after tax by 88.2 per cent annually.
  
• Valuation: The stock will be priced at a P/E and P/B of 10.5 and 1.4 times, respectively.
  
• Overview: Jana Small Finance Bank aims to capitalise on the growth prospects in the rural areas. These areas lack financial services and are relatively less competitive. As a result, they offer higher growth potential to banks and NBFCs to lend in these areas. This is evident from the fact that, despite rural areas contributing 47 per cent to India's GDP, they received only 8 per cent of the overall banking credit as of March 31, 2023.

About Jana Small Finance Bank

Jana Small Finance Bank is the fourth largest small finance bank in terms of deposit size as of September 30, 2023. It operates via 771 banking outlets in 22 states and two union territories. As of the first half of FY23, secured loans accounted for around 57 per cent of its total loan portfolio (keeping in mind the recent regulatory actions on the unsecured space, it becomes important to keep track of this metric).

Its loan advances comprise:
(i) Secured loans

• Microloans, comprising MSME loans and other microloans against properties
• Retail loans, including gold loans, mortgages, loans to NBFCs, and vehicle loans

(ii) Unsecured loans

• Personal loans
• Loans to micro businesses
• Agricultural and allied loans

Strengths of Jana Small Finance Bank

Lower regional dependence: The highest concentration of its business from a single state does not exceed 14 per cent. This is a plus as most small finance banks have high regional dependence.

Weaknesses of Jana Small Finance Bank

• High credit cost: Its credit cost of 3.6 per cent stood the highest among its peers as of September 30, 2023, reflecting poor credit quality. Credit cost refers to the provision expenses for a period as a percentage of net advances.
  
• Low PCR: Historically, the bank had a three-year average provision coverage ratio (PCR) of 31.4 per cent. However, this has recently improved to around 65 per cent.

Risk report

Management

• Is Jana Small Finance Bank free from regulatory penalties?
  Yes. The management is free from any significant regulatory penalties.
• Does the bank provide for its non-performing assets (NPAs) adequately? Specifically, is the provision-to-gross NPAs ratio more than 50 per cent?
  Yes. Its provision coverage ratio (PCR) stood at 64.9 per cent as of September 30, 2023, Although the three-year average stood at 31.4 per cent between FY21-23.
• Do the top five managers have stock as a significant part of their compensation (more than 50 per cent)?
  No. While ESOPs (employee stock ownership plans) were offered in the past, stock-based compensation does not form a significant part of the top five managers' income.

Financial strength and stability

• Does Jana Small Finance Bank have a fresh slippage-to-total advances ratio of less than 0.25 per cent? (fresh slippages are loans that became NPAs in the last financial year)
  No. The ratio stood at 7.3 per cent for the year ended FY23 and 2.4 per cent for the September 30, 2023 quarter.
• Did the bank generate a current return on equity (RoE) of more than 12 per cent and a return on assets (RoA) of more than 1 per cent?
  Yes. It reported an ROE and ROA of 16.8 and 1.1 per cent, respectively, in FY23.
• Has the Jana Small Finance Bank increased its loan book by 20 per cent annually over the last three years?
  Yes. The bank increased its loan book by 25.5 per cent annually between FY21 and FY23.
• Has the bank increased its net interest income (NII) by 20 per cent annually over the last three years? (Net interest income is the difference between the revenue generated from an SFB's assets and the expenses associated with paying its liabilities).
  No. It achieved an annualised growth rate of 14.6 per cent in net interest income between FY21 and FY23.
• Is there a direct relationship between the increase in the loan book and the increase in net interest income (NII)?
  Yes. Although the growth in NII and advances had a direct relationship, the pace of NII growth was relatively lower due to a reduction in its yields (from 21.8 per cent to 18.1 per cent between FY21-23).
• Is the Jana Small Finance Bank's capital adequacy ratio more than 15 per cent?
  Yes. The bank reported a capital adequacy ratio of 17.5 per cent as of September 30, 2023.
• Can the bank run its business without relying on any external funding in the next three years?
  Yes. The bank's capital adequacy ratio was 17.5 per cent as of September 30, 2023, which is well above the regulatory requirements. The financial strength, coupled with the IPO proceeds, would ensure the sustainability of business operations without external help.
• Did the bank generate an average net interest margin (NIM) of over 3 per cent in the last two years? (Net interest margin or NIM denotes the difference between the interest income earned and the interest paid by an SFB or financial institution relative to its interest-earnings assets like cash).
  Yes. Its average three-year net interest margin (NIM) stood at 7.8 per cent.
• Is the bank's average gross NPA ratio (Gross NPAs/Total advances) over the last three years less than 1 per cent and the average net NPA ratio (Net NPAs/Total advances) less than 0.5 per cent?
  No. It reported an average GNPA (gross non-performing assets) ratio of 5.6 per cent and an average NNPA (net non-performing assets) ratio of 4 per cent during FY21-23.
• Does the bank have a cost-to-income ratio of less than 50 per cent?
  No. It reported a cost-to-income ratio of 56.2 per cent in FY23.

Growth and business

• Will Jana Small Finance Bank be able to scale up its business?
  Yes. As rural areas have lower financial inclusion than urban areas, and there is thus less competition for banking services in the former compared with the latter, the company's future prospects look bright.
• Does the bank have a loan book of more than Rs 1,00,000 crore?
  No. It reported an AUM (assets under management) of Rs 18,639 crore as of September 30, 2023.
• Does the bank have a recognisable brand truly valued by its customers?
  No. Many banks, NBFCs and small finance banks are lending to the MSME and retail segment.
• Does Jana Small Finance Bank have a credible moat?
  No. The bank operates at a small scale in a commoditised market.
• Is the level of competition faced by the bank relatively low?
  No. Although the competition was previously low, it has been rising with the entry of new small finance banks and big banks trying to grab a share in the rural segment.

Valuations

• Is the bank's price-to-earnings ratio lower than its peers' median level?
  Yes. It is valued at a price-to-earnings ratio of 10.5, lower than its peers' median level of 14.3.
• Is the bank's price-to-book ratio lower than its peers' average level?
  Yes. It is valued at a price-to-book ratio of 1.4, lower than its peers' average level of 2.3.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

Also read: Another IPO frenzy begins