How does Suryoday SFB fare against its peers?

Suryoday Small Finance Bank plans to raise around Rs 249 crore from the primary market to augment the tier-I capital base and another Rs 334 crore through offer for sale. The small finance bank (SFB) displays better net interest margin (NIM) and return on assets (RoA) than the listed peers.Microfinance, which is a high-risk lending segment, accounts for two-third of the company’s loan book. The proportion of current and savings account (CASA) in the deposits remains the lowest among peers. Despite being the smallest SFB among the listed peers, Suryoday’s IPO valuation is at par with some of the larger listed peers. In addition, concern over a possible deterioration of asset quality for lending entities over the next few quarters is high. Given these factors, investors may wait to see the company’s performance and asset quality trend for the next few quarters before taking an exposure. 81522444BusinessAfter commencing microfinance operations in 2009, Suryoday started operations as an SFB in January 2017. It has 554 banking outlets across 13 states and union territories with a concentration in Maharashtra, Tamil Nadu and Odisha. At the end of December 2020, microfinance contributed over 70% to the loan book while the rest was attributed to other loan categories including commercial vehicles, affordable housing, secured and unsecured business loans and others. Its capital adequacy ratio was 41.2% at the end of December 2021, the highest among peers. It is expected to increase to 54% after the IPO. FinancialsThe company’s loan book grew by 47% annually between FY18 and FY20 to Rs 3,710.8 crore. It was Rs 3,908.2 crore at the end of December 2021. Deposits grew by 95% annually during the period to Rs 2,848.7 crore and increased to Rs 3,343.8 crore at the end of the December quarter. The CASA proportion was 13.3%, the lowest among the listed peers. The NIM was 11.9% while RoA was 2.5% in FY20; both were the highest among peers.The banking sector in general has not recognized gross nonperforming assets (GNPA) since August 31, 2020 following an interim order by the Supreme Court. This has kept the GNPA ratio low. The proforma GNPA takes into account the deterioration in the asset quality since August. In the case of Suryoday, it is at 9.3% compared with 3-5% for the peers. This may put pressure on the margin and return ratios in the coming quarters. ValuationThe company demands a price-book (P/B) multiple of two considering the book value after the IPO, pre-IPO placement, and preferential allotment to promoters. This is similar to the P/B of Ujjivan SFB and Equitas SFB, which are however three-four times bigger in terms of the loan book size with better CASA ratio and lower proforma GNPA ratio. Investors, therefore, may monitor Suryoday’s performance over the next few quarters before making an investment decision.

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