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Three States A financial drive through Southern India

CONTRIBUTING ANALYSTS

Dipen Sheth, Head – Institutional Research [email protected] +91-22-6171 7339

Darpin Shah [email protected] +91-22-6171 7328

Vishal Rampuria [email protected] +91-22-6171 7325

Pranav Gupta [email protected] +91-22-6171 7337

28 November, 2017

Three States: A financial drive through Southern India

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Three states We drove through nine cities in southern India (across the states of Kerala, TN and Karnataka) to gauge ground realities in retail/SME credit segments such as Vehicle finance, unsecured Retail/Business loans, Housing finance, LAP (loan against property) and Micro-finance. Higher financial penetration in southern India (relative to the rest of the country) is in keeping with the fact that income (and literacy) levels across the states we visited are significantly higher (~21% over FY12-16) than national averages.

We were pleasantly surprised to see that despite various difficulties and disruptions (such as political turmoil, drought, demonetisation, GST rollout, industrial stagnation and allegedly weak business confidence), credit demand remains healthy. However, competition is stiff. In addition to banks and NBFCs, a large number of unorganised players cater to Tier 3/4 borrowers. Asset quality is mostly holding up as per formal (and anecdotal) evidence we gathered. Borrowers’ financial discipline (and awareness) limited the adverse fallouts of recent shocks like demonetisation and farm loan waivers, in contrast with the rest of India.

Our interactions confirm our positive stance on CUB (City Union Bank), while we continue to like CIFC (Chola Inv & Fin) in the NBFC space. We also retain confidence on our constructive thesis on DHFL (Dewan Housing) and Ujjivan.

Commercial Vehicles (CV) CIFC and SUF are highly respected by all players for

their diligence and prudent practices Select financiers are resorting to rescheduling and

cash payouts to hide borrower stress

Passenger Vehicles (PV) Many players operate primarily in identified niches

(eg. premium cars for Kotak Prime) Customers’ preference tilts toward PSBs (particularly

SBI), esp. amongst salaried folks

Two Wheelers (2W) Pressure on sales vols in TN owing to regulatory

issues (no sale without driving licence) Credit substitution via gold loans, as rates are lower

Unsecured Loans Delinquencies are lower than national average,

reflecting evolved credit behaviour Rates and policies vary starkly across financiers,

exposing them to differential risk

Housing Loans (HL) Growth challenges visible in the face of weak

demand, pricing pressures and high balance transfers Large HFCs will benefit due to competitive CoF

LAP/BL Competitive market with rates as low as 8.5% Some players are providing aggressive loans even on

unapproved structures

Microfinance Normalisation across the sector, barring a few

locations Use of technology can provide oplev hereon Strong focus on individual loans


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Per Capita Net Domestic Product Rs Kerala Tamil Nadu Karnataka Avg All India Variance (%) FY12 97,912 92,984 90,263 93,720 63,462 47.7 FY13 110,314 105,031 102,319 105,888 70,983 49.2 FY14 123,388 116,329 118,829 119,515 79,118 51.1 FY15 135,537 128,385 129,823 131,248 86,454 51.8 FY16 147,190 137,837 142,906 142,644 94,130 51.5 Source: HDFC sec Inst Research

Peer Valuations

BANK/NBFC Mcap (Rs bn)

CMP (Rs) Rating TP

(Rs) ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%)

FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E ICICIBC # 2,031 317 BUY 364 114 134 151 15.5 13.2 11.7 2.09 1.66 1.48 10.5 10.8 9.5 1.20 1.19 1.18 KMB # 1,978 1,040 BUY 1,179 181 205 235 37.9 31.4 24.8 4.83 4.16 3.52 13.9 13.3 14.5 1.89 1.89 1.94 AXSB 1,341 560 NEU 504 199 234 271 35.9 18.5 13.4 2.82 2.40 2.07 6.5 11.7 14.5 0.58 0.99 1.16 IIB 990 1,663 BUY 1,809 382 444 521 28.1 22.9 18.3 4.36 3.75 3.19 16.2 17.3 18.5 1.79 1.80 1.81 FB 218 112 BUY 137 59 65 72 20.6 16.1 12.9 1.92 1.73 1.55 9.9 10.5 11.9 0.84 0.91 0.97 CUB 106 161 BUY 196 56 66 78 17.9 15.5 13.0 2.88 2.45 2.07 15.5 15.4 15.8 1.58 1.57 1.57 DCBB 59 191 BUY 214 78 88 99 22.5 17.8 14.7 2.44 2.18 1.94 10.9 11.1 12.2 0.97 1.02 1.02 SBIN # 2,907 337 BUY 373 119 157 190 23.4 15.0 8.6 2.04 1.54 1.26 4.5 6.1 10.0 0.29 0.38 0.60 BOB 405 175 BUY 202 97 136 175 26.5 13.9 8.0 1.81 1.29 1.00 4.1 7.4 11.8 0.22 0.39 0.62 AU 189 665 NEU 550 76 89 105 62.4 48.1 35.7 8.81 7.49 6.32 14.2 16.0 18.4 1.78 1.71 1.85 Equitas 49 146 NEU 160 64 67 73 90.3 36.7 21.0 2.28 2.19 2.00 2.4 5.7 9.3 0.54 1.11 1.24 Ujjivan 49 409 BUY 435 146 163 185 371.4 24.2 19.0 2.80 2.51 2.21 0.7 10.9 12.4 0.15 1.90 1.96 LICHF 301 597 BUY 675 242 283 328 14.6 12.5 10.7 2.46 2.11 1.82 17.3 17.6 17.8 1.27 1.30 1.31 SHTF 287 1,265 BUY 1,346 435 501 576 19.8 15.5 12.4 2.91 2.52 2.20 12.2 14.1 15.7 1.83 2.03 2.16 CIFC 198 1,268 BUY 1,427 267 339 422 22.0 17.1 14.1 4.75 3.74 3.01 19.2 20.7 21.1 2.65 2.81 2.84 DHFL 193 616 BUY 685 262 288 320 17.9 14.1 12.1 2.35 2.13 1.93 12.9 15.0 15.8 1.33 1.40 1.39 REPCO 39 625 BUY 770 198 241 278 19.1 16.1 13.4 3.16 2.59 2.25 16.6 16.9 17.4 2.11 2.17 2.20

Source: Company, HDFC sec Inst Research, # Adjusted for subsidiaries value


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Vehicle finance With widespread presence of large (and small) private banks, foreign banks, NBFCs and PSBs, vehicle financing is a very competitive business across Southern India. Aggression is rising, especially in PVs. Unorganised financiers are also thriving. Kerala tilts towards the LCV and SCV segments, while TN is more broad-based, with HCV hubs like Salem, Namakkal and Coimbatore. In 2Ws, Kerala is dominated by Scooters, whilst Tamil Nadu has a more motorcycles in the sales mix. Regulatory issues (in TN, where 2W sales are restricted to license holders) have affected sales.

CV finance

Our branch visits indicated disbursal growth rates of 10-15% YoY (for listed NBFCs) to as high as 25-30% (albeit on a smaller base) for unlisted players

In Kerala, NBFCs believe there is some sanity in yields and LTVs. The situation is different in TN, where competition is affecting both yields and LTVs - captive financiers offer 100% LTV

TAT has seen some improvement with the introduction of distributed IT systems by some players, notably CIFC. Post demonetisation, cash collection did witness a decline. MMFS reported 30-45% decline vs. 15-30% for peers

In contrast with what we saw across UP, loan waiver announcements did not affect asset quality as most borrowers (80-90%) were well versed with its applicability.

NPA levels are largely in line with the national average for lenders like MMFS and CIFC.

As witnessed in our travel through UP earlier this year, MMFS’ collection efficiency has improved ~300-500bps, with more employees focusing on collections than sales. Creation of departments within the collection team (hard and soft buckets) further boosted efficiency. Since Apr-17, CIFC has also witnessed a sharp reduction in NPAs, with improved collections

Its commendable to see each CIFC employee talking about pre-tax RoAA (similar trends witnessed in our previous yatras to UP and Pune)

Sundaram Finance and CIFC are highly regarded for fair practices by almost all their significant competitors (HDFCB, HDB, MMFS) and even borrowers

Private Banks like YES (though a smaller player) and IIB were repeatedly spoken about for their ‘wrong’ practices (rescheduling, lower rates, cash collections and payouts to executives, and relatively higher payouts). Amongst NBFCs, SHTF was repeatedly mentioned for rescheduling of loans, and providing loans not only for vehicles, but also for tyres, insurance and maintenance

Most of HDB’s hires are from CIFC, similar to what we saw in UP!

PV segment

Market size varies across regions, with Trivandrum having a greater share in Kerala, and Salem (and the surrounding areas) being a major contributor in the TN region

Post demonetisation, the proportion of financed vehicles has gone up to ~70% vs. 60% earlier

Maruti is the market leader, followed by Hyundai and Honda

Disparity in cash collections

CIFC customer paying cash


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Mid-sized vehicles (in the range of Rs 0.5mn to Rs 2mn) form a major proportion of sales, with SBIN being one of the largest players in the region

SBIN remains competitive across segments, while KMP caters mainly to Premium cars

In the rural markets (predominantly used cars), both captive financers and NBFCs are relatively more aggressive

Surprisingly, most players believe that there is sanity in yields and LTVs; but payouts vary across peers, with IIB paying ~3.5-4% (in all regions)

Lower TAT is a deciding factor for most dealers. Most PSBs lose here, while digitisation has helped private players bring down TAT.

Better asset quality performance, given a higher proportion of salaried borrowers (especially in Kerala)

Repossession remains a big challenge in Kerala, owing to higher political intervention. With this, SCUF has stopped PV financing, while SUF is re-entering some markets

2W segment The market size of Kerala and Tamil Nadu put

together is at 0.17 to 0.2mn units/ month, which is relatively smaller when compared to other states

The govt. order in TN prohibiting sales of 2Ws to people not holding a driving license has adversely affected sales

The overall proportion of financing is gradually reducing, as borrowers prefer taking gold loans that are available at significantly lower rates to finance their vehicles

With Kerala predominantly being a Scooter market, HMSI has the highest share here. Even in TN, HMSI is the market leader, followed by Bajaj and Hero

As witnessed in PVs, competition in 2Ws is restricted to dealer payouts, with IIB, YES and CAFL (in some regions) offering 3.5-4%. LTV trends remain largely similar across players

Lending rates in the 2W space range from ~18% to ~30%, with SCUF at the higher end and private banks at the lower end

While demonetisation led to an overall slowdown in sales, we sensed no major worries on asset quality

Even post demonetisation, cash collection for SCUF continues to be north of 40%

Extreme competition in the region

Extreme competition in the region

CIFC old vehicle scheme

SCUF schemes for 2W’s


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MMFS MMFS has discontinued 2W and 3W businesses in

Kerala (owing to higher losses)

Avg. yields are 14.5-15%; TAT of 1-2 days; payouts at ~1.5-2.5%

Market share at 30-40% at MM dealership; 12-15% at Maruti dealership

~50% of the customers operate on earn and Pay model

Cash collections at 30-45% dipped vs. pre-demonetisation levels, albeit remain elevated

Most employees are focused on collection vs. sales earlier

NPAs in the range of 9-10%; MM vehicle contribution is lower as it has stopped 3W financing

More focus on collections of current dues (CD, i.e. 30DPD) vs. overdues (OD, +120DPD). Further, the co now focuses on 12M+ overdue accounts, which were hardly addressed. Now, the legal team works on these cases. and is witnessing recoveries

Collection efficiency: Improvement of 300bps YoY

Stock of repossessed vehicles has significantly reduced over the last 6-12 months

Loan waiver and freebies are of no major concern, as most NBFCs regularly educate borrowers about the same. ~60-80% of the borrowers are educated about loan waivers and the free freebies

Target: Disbursals growth of ~15% and lower NPAs by 200-300bps

CIFC In the PV and 2W segments, the cash purchase

proportion is gradually increasing, as agri and Gold loans are available at lower rates.

Demonetisation, GST and BS IV impacted sales of new vehicles, which has led to a rise in the proportion of refinance

Avg. yields at ~15.5-16%%. Segment-wise yields at 2W 20-22%, LCV ~13%, Cars at 10-14%, SCV 15%; Used/Refinance at 18%, HCV 11%. LTVs of 85-90% and TAT of ~2 days in most sub-segments

Payouts at ~1-2.5% (2W 3%, LCV 1-1.5%, Cars 2%, SCV 1.5% and HCV ~1%)

Avg. tenure of ~4 years; incremental tenures are increasing, given higher vehicle prices

Focus on higher cross-selling – HDFC Life and Motor insurance

Cash collections vary in the range of ~5-30%

Sharp drop in NPAs (since April-17), with a focus on recoveries (collecting more than one EMI)

Stock of repossessed vehicles has fallen sharply

No major worries on loan waiver, as a majority (70-90%+) of borrowers are aware about the details of loan waivers

TAB initiative is not successful as of now; having issues in uploading pictures

Lenders preferred by dealers based on (1) Payouts, incl. cash payout to executives, (2) Customer profile: A-B category HDFCB/SBIN/ICICIBC, B-C category IIB and CIFC. Others to captive financiers

Driving change from the top

MMFS collection board

MMFS encouraging digital payments


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Unsecured products (PL/BL) The market for unsecured loans is very fragmented. A further challenge is that customer behaviour (and hence, risk) differs across the south. Players in the PL space are largely focused on cross selling to their existing customer base, in a bid to curb risk. For banks, the focus customer segments are salaried people. NBFCs like BAFL/SCUF focus on un-banked customers. For most lenders, asset quality is relatively better than the national average in the segment, despite higher yields and the inherent risks of unsecured lending. Although competition in this segment is relatively benign, we gathered that AXSB is offering lower rates (similar to the feedback we received in some regions of UP in our Jun-17Yatra). This has, understandably, influenced pricing. Growth in Kerala is challenging, as a large portion of

customers are paid their salaries in cash (esp government employees). Hence, lack of documentation is a hindrance in the appraisal process.

In the salaried segment, PL yields vary from 10.5-17.5%, depending on the slab for most players. In contrast, loans are given in a narrow (and higher) range of 15-18% for non-salaried borrowers, with NBFCs pricing loans at the higher end of the band

Different players operate in identified niche segments, and are doing well in their chosen areas. For instance, BAFL is focused on business loans, while players like ICICIBC, AXSB, YES and IIB are mostly active in PLs

Most borrowers cite home renovation, marriage, education and medical needs as the end use

AXSB is offering PL at lower rates, in a bid to poach customers. It does not charge any pre-closure or balance transfer fees which entices customers, while some private banks charge ~4% for pre-closure (incl. BT)

Some regional PSBs are also trying to capture share by offering lower rates in bigger proposals (loans for employees of CAT A/B companies)

Delinquencies in Kerala and Tamil Nadu are lower than the national average

No major collection problems were faced post demonetisation. However, disbursement growth was hit, and has only seen some traction in the past few months

HDB product offerings

AXSB offers lower rates to gain market share

HDB Customer


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Home loans Housing demand in TN and Karnataka continues to be sluggish. The impact of demonetisation, along with sticky and unaffordable property prices, continues to pose demand challenges. However, demand for affordable homes is good, with the segment growing at 20-25%. The registration issue in TN and sand mining restrictions (along with political instability) pose housing supply bottlenecks.

Given the overall weak demand, competition is very high, with large HFCs as well as banks offering very competitive rates. The home loan rate war commenced in Jan-17, with PSU banks offering very attractive interest rates starting at 8.35%. With no prepayment penalty under RBI/NHB rules, the balance transfer/takeover of loans has substantially increased subsequently, leading to industry-wide compression in lending rates. While this holds true for high-ticket loans, we discovered that even low-ticket sized loans (under Rs 2.5mn) are being taken over. Large HFCs and banks are very active in the balance transfer space across all ticket sizes. Asset quality, however, remains stable. Implementation of the PMAY subsidy scheme remains muted in this region.

Most South Indian branches of HFCs are reporting YoY disbursement growth of 15-20% (for the large players) and 5-20% (for the smaller players). Demand for high-value houses (above Rs 4-5mn) is sluggish; property prices continue to be unaffordable, with a huge supply of stock

Demand for affordable housing (Rs 1 to 2mn) remains in a sweet spot. Many private players are jumping into the fray to build affordable houses, given

incentives provided by the Central govt. and strong demand. However, the supply of affordable housing from the state govt. remains on the lower side

LTVs remain stable at 70-80%

An aggressive pricing war and takeover of loans is visible, with interest rates starting at 8.35%

Some players like SBI, DHFL are offering takeover and top-ups at the same interest rates

Contribution of takeover of loans within disbursements has increased; it contributes 15-20% and 40-50% for small and large lenders respectively

While large HFCs and banks are gaining from balance transfer, smaller players are net losers, owing to competitive interest rates offered by the biggies, including banks

Prepayment rates have increased for many lenders to 12-20%

Success of the PMAY subsidy scheme is not high (5-10% of eligible borrowers). Reasons attributed for this are complying with the criteria and conditions of the subsidy like area, size of the house, etc

Post demonetisation, almost all lenders are insisting on ECS payment

Delinquency and stress levels are different across regions. While places like Madurai and Trichi have good asset quality, cities like Coimbatore have high NPAs. It seems that the higher domination of industrial activity in Coimbatore vs. Madurai and Trichy (which are dominated more by Agri-related activity) has led to a cyclical income downturn

RERA implementation is creating short-term hiccups, as many projects are yet to be registered


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DHFL

DHFL is part of the Wadhawan Group, with a pan-India presence. It has a market cap of Rs 193bn, and an AUM of Rs 941bn. During FY17, the AUM loan book grew 20%, and ROA improved 1.57%, owing to a drop in the cost of funds. During 1HFY18, its disbursement grew 42% leading to 25% growth in AUM. We have a buy Rating on the stock which trades at 2.1x FY19E BV.

DHFL is one of the fastest-growing large HFCs in the south

Despite a sluggish external environment, disbursement growth is at 50-80%. Realignment of the sales area and strengthening of channel partners are helping to generate large leads. An upgradation in processes is helping improve the turnaround time

Home loans and LAP split is 90% and 10%; Home loans is a key focus area

Blended yield on Home loans is 9.6%

Self-construction, along with plot purchase constitutes 50-60% of the demand

20-25% of the disbursement is the takeover of loans

Loans under the assessed income category have 1- 2% higher rates

The proportion of the self-employed and salaried class (including govt employees) is 40:60

With the average ticket size at Rs 1.2-1.5mn, strong growth is witnessed in the Rs 1 to 3mn range of property

80% of loans are sourced through DHFL’s employees

PAR>30 is 1.5-2%, NPA is 0.8%

REPCO HOMES Repco Homes is a south-focused mid-sized HFC, with an AUM of Rs 90bn. The company largely focuses on the self-employed, who have no access to formal credit. Over the past year, it faced challenges in disbursement growth owing to unregistered land woes and asset quality stress, especially in the LAP book. During 2QFY18, the loan book growth rate was muted at 10% but NIMs were steady. We have a BUY rating on the stock which trades at 2.6x FY19E BV.

The proportion of the self-employed and salaried classes is 60:40, in-line with the company’s overall mix

The average ticket size is Rs 1.4mn for Home loans

Home loan interest rates for the salaried class are between 8.75 and 9.75%, and for the self-employed between 10.25 to 11.25%. LAP is between 12-15%, and the average yield is 10.3%

With stress levels prevalent in high ticket-sized loans, the focus is on lower ticket-sized loans (below Rs 7.5mn)


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Loan melas, held twice a quarter, are significant contributors to demand/leads

Registration issues for unregistered plots and political inaction in TN have created supply hurdles, impacting demand

Disbursement growth in TN continues to face headwinds, and is between -5% and 20%. Balance transfer has increased in the last 4-5 months. Customers have been given lower interest rates, and are being poached by large players; 15-20% balance transfer rate

Delinquencies and NPAs remain divergent

Branches in Coimbatore continue to face stress, with PAR and NPAs exceeding 9% and 4-5% respectively. This is owing to large exposure in 4 to 5 construction, paper mills and money lending accounts

However, the branch in Madurai has good asset quality, PAR>0 of 7% and NPA at 0%

DHFL VYSYA HOUSING DHFL Vysya, an unlisted HFC, is part of the Wadhawan Group. The company has a focus on housing, with customers largely in the low and middle-income segment. As on 1QFY18, it has an AUM of Rs 19.2bn.

Home loan and LAP is 90:10

Yield on HL is 11.75% and LAP is 13.5%; average yield at 12%

Average ticket size is Rs 1-1.2mn

75% is the salaried class, 25% non-salaried

Disbursement growth rate is 40-50%

PAR>30 days is 3%, GNPA 1.4%

Beneficiaries of the PMAY subsidy are few, owing to urban areas not being included in the PMAY-Urban Scheme. Also, many properties are not qualifying, owing to larger sizes


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Secured products (LAP/BL) The LAP market is very aggressive. The presence of a spectrum of players like private banks, HFCs and NBFCs has led to highly competitive interest rates.

Weak credit demand is countered with balance transfers and offers of higher LTV and lower interest rates.

Some players are reportedly considering unapproved structures for sanctioning of loans. Though overall stress levels are stable, they are high in pockets like Coimbatore, with a high proportion of the self-employed and small-scale industries. GST has created a higher level of formal credit demand. Formal credit and GST are leading to higher disclosed revenues. Given the lack of LAP products in many PSU banks, most NBFCs poach customers from them.

LAP/BL is highly competitive, with rates as low as 8.5%, and a tenure of up to 15 years for high ticket-size loans

Balance transfer is high, at ~25-30% of disbursements. Lenders will avoid sanctioning of loans in an individual’s name, which allows them to levy pre-payment charges and retain borrowers

Demand is increasing owing to GST, owing to the need for money that is accounted for

Client feedback has prompted lenders to believe that retailers have adjusted to GST, though the wholesale channel continues to be impacted

LTV is in the range of 50-60%. However, the provision of loans against unauthorised structures has led to above-100% LTV loans

Stress levels are lower for loans under Rs 10mn, as compared to those above this slab

Some NBFCs offer products according to quantity/quality of information available

Most players are focused on smaller ticket-sized loans

PNBHF is offering sub-10% interest rates, and executes maximum BT cases

Many players are inflating property valuations, leading to effective LTVs in excess of 100% (Tata and Bajaj Fin in Kerala). In some regions of TN, Hero Fincorp and L&T Fin are following similar practices. CAPF provides additional PLs to existing LAP customers (thus having overall LTVs in excess of 100%)

Most large proposals come through the DSA channel, and are traditionally more prone to asset quality issues and higher payouts

CIFC Area covered is within a distance of 20-40kms/

branch

Sourcing is a mix of DSA and the internal sales force, varying from region to region

Customers are mostly retailers and traders

Avg fee is at ~2%; below Rs 5mn – Rs 2,950 + 1.5%; between Rs 510mn – Rs 5,900 + 1.5%, and above Rs 10mn – 1.75%

LTV ranges from 50-60%, depending on the type of property (SORP or commercial). LTVs were higher before demonet

Payouts are in the range of 0.5-1%, lower as compared to peers

Avg yields differ from customer to customer, and depend on documents available. CIFC lends at rates as low as 11.5%, and can go up to ~14%. Average tenure is 8-10 years


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Though the focus is on lower ticket-sized loans (Rs 3.5-4mn), CIFC is also dealing in large-ticket loans, albeit to a lesser extent

Apart from a couple of regions (particularly Salem), asset quality is largely below company averages. The negative effects of demonetisation and GST are still visible in certain regions

Competition is fierce. Many players are offering lower rates, higher LTVs (by inflating valuations or including unapproved constructions), and longer tenures CIFC is continuously losing deals to PNBHF, owing to undercutting in terms of yields and LTVs


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Microfinance The demonetisation impact is now negligible on MFIs. Collection efficiency has recovered, and is ~96-97% in most pockets. However, a few affected districts continue to report high PAR (15-17%). The number of non-paying customers has also reduced notably. Most MFIs are focusing on disbursing Individual loans to customers who have a good credit history, or secured loans.

Our interactions reveal that collection efficiency has improved to 90-98%. However, urban centres in Bangalore continue to report weak collections. The farm loan waiver has had no impact, with the borrower understanding the difference. Many players resorted to top-up loans to help customers clear past dues

Players like Bandhan and Janalakshmi are aggressive in providing very high-ticket-sized loans, even to delinquent customers. Many players are now focussing on disbursing individual loans to good customers

Possession of an Aadhar card is compulsory for new loans, which is expected to remove duplicate and fake customers from the system over a period of time. The overall write-off from current delinquencies is expected to range between 4-5%

We believe MFIs play an important role in financial inclusion of the bottom-of-the-pyramid by providing capital for income-generating purposes. Many players have moved or are moving to superior usage of technology via E-EYC and Instant Pay. This is expected to strengthen the business model, and also lead to lower opex costs. Many players are now focussing on individual loans outside the JLG for customers with a good credit record, or those who can provide security

FULLERTON Fullerton is owned 100% by Temasek. It has a pan-India presence, with a network of 437 branches as on March 31, 2015. FICCL’s loan portfolio was Rs 86bn as on FY15, comprising Personal loans (37.9%), Mortgage loans (23.6%), Rural Financing (18.7%), SME Financing (14.5%), Vehicle loans i.e. 2W, Car loans and CV loans (5.2%).

Offers Microfinance, 2W loans, Growing Enterprise loans, Equipment loans and Mortgage loans

70% MF and 30% non-MF loans Collection efficiency has returned to normal levels of

99%+ PAR is 1%, while GNPA (120 days) is 0.5% Cashless disbursement since April 2016 One credit officer covers 30-40 groups. He interacts

with every customer. There is a 3-day education programme, followed by a group recognition test

Fake IDs are minuscule


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EQUITAS Equitas Holdings, headquartered in Tamil Nadu, is a lender to underserved segments in urban, semi-urban and rural India. With an AUM of Rs 72bn, it provides Microfinance, Used CV loans, MSE and Housing Finance loans. Its ROA dropped from 3.05%in FY16 to 2% in FY17, owing to its conversion to a SFB from a NBFC-MFI. Currently, we have a Neutral rating on the stock which trades at 2.2x FY19E BV.

Non-vehicle branch in Madurai

The branch is 10 years old, and the current AUM is split into MF/M-LAP/other loans

Collection efficiency is 99.5%, with PAR>0 of 1%

It is targetting 20-25% growth rate in the loan book

It operates in the radius of 30 kms, focussing on non-MF loans like M-LAP, Business loans, Housing loans etc

Vehicle branch in Trichy

Loan book grew 30% last year, and continues to expand at the same rate

PAR>0 in the used CV segment is 20%, GNPA is at 4.5-5%, and has remained stable

LTV stands at 65%

Lending rate is 20-24%

Provides top-up loans, if 30% of the principal has been repaid

UJJIVAN Ujjivan Small Finance Bank is an NBFC-MFI-turned SFB. It commenced banking operations in February 2017, and has a pan India presence. Its market cap is Rs ~40bn and has an AUM of Rs. ~64bn.During FY17, the AUM loan book grew by 18%. 95% of the loan book comprises Microfinance loans (JLG+ Individual). We have a BUY rating on the stock, which trades at 2.5x FY19E BV.

PAR >0 is in the range of 15-17%; pre-demonetisation it was lower than 1%

During demonetisation, collection efficiency was down to 60%. It has now recovered to 90%+

Non-paying customers have reduced considerably, and now stand at 6-7%. However, there is little hope of recovery from non-paying customers. Women cannot be forced to repay, and there is interference from local politicians/workers too

Offers JLG loan at 21.25% and non-JLG at 23.25%. Ujjivan continues to maintain its lending rate, which is helping it overcome burgeoning opex witnessed during SFB conversion

No fresh loans are issued without an Aadhar card. Old loans were issued against ration cards, driving licenses, voter ID cards etc

Top-up loans were given to customers who started repaying loans

Disbursement is completely cashless Credit bureau checks are strong, with no loans given

to delinquent customers. There were complaints about a few NBFCs not reporting to the credit bureau

Focusing on Individual loans, based on credit history in the JLG format

Plans to start the secured lending book The bank branch is six months old, and has

CASA/RD/TD of Rs 3.3/5.3/6.5mn respectively

Equitas-Centre meeting

Ujjivan-Centre meeting


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FEDERAL BANK In its stronghold region, FB is performing well. Despite chunky exposure in the Corp segment (largely the Kerala govt), asset quality remains stable. (Though below the overall banks’ level). Though FB faces stiff competition in some Retail loans (HL, PV and LAP, owing to higher payouts by other banks), the bank continues to hold on to its share without diluting risk. While the Kerala business is highly skewed towards deposits, TN is heavily tilted towards advances. Maintain BUY with a TP of Rs 137 (2x Sept-18 ABV of Rs 68). FB has made some operating changes, which have

helped optimise performance Setting up credit hubs for credit appraisal and

better underwriting Bringing in the RM structure across products, and

offering tailor-made solutions to large enterprises, and strengthening relationships

Exclusive tie-ups with the Kerala government for remittances. Presence in all payment gateways will also aid fee income

Advances growth in Tamil Nadu has been mainly owing to the SME portfolio being driven by higher ticket-sized loans. Though growth in the SME slice has shot up, credit underwriting is being given special attention

Retail growth was hit owing to certain bottlenecks (namely ambiguity in business licenses). Mgt believes that these should ease off hereon

Major competition includes AXSB and SBIN (only in HL), and regional banks like KVB and LVB

Federal bank offerings


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CITY UNION BANK CUB’s focus on building strong relationships with its customers has enabled the bank to grow at a steady rate and also maintain asset quality. CUB’s offerings are largely in line with other private banks, so customers are comfortable with higher perceived rates Iron, steel and textiles are the main contributors of NPAs. Maintain BUY with a TP of 196 (2.75x Sept-19E ABV of ~Rs 72). Focus on customer retention, steady growth and

maintaining asset quality

CUB also offers a variety of personalised services

The contribution of transactions via alternate channels has been increasing in all branches

CUB is poaching customers not only from PSBs, but also from large private banks. Customers of e-SBH are unhappy with SBIN’s service, and are being poached by the bank

CUB largely focuses on granular loans. However, exposures to the Iron & Steel segment has impacted NPA levels

Top mgt is committed to giving the greatest satisfaction to both customers and employees. (Monetary: salary, ESOPs and performance bonuses)

CUB’s gold loan offering

Motivational meets by Dr Kamakodi

CUB Customers

Digitally advanced


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