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Are We Seeing A Surge In Small Finance Bank IPOs?

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Are We Seeing A Surge In Small Finance Bank IPOs?
Himali Patel - 22 October 2020

Equitas Small Finance Bank (ESFB) IPO subscription on its last day of subscription on October 22, 2020, witnessed its issue price fully subscribed with retail investors subscribing to the IPO by 2.12 times. The price band of the offer by ESFBL was fixed at Rs 32 to Rs 33 per equity share. The issue size of the IPO is in the price band of Rs 501.9 – Rs 517.6 crore.

The bank is the largest Small Finance Bank (SFB) in India in terms of the number of outlets, second in terms of assets under management, and total deposits in fiscal 2019. Brokerages like AnandRathi, Yes Securities, Emkay Global Financial Services, and HDFC Securities continue to remain bullish on the bank’s prospects.

ESFB offers a strong play on unserved and underserved niche customer segments, where margins are high, subject to risks being managed. ESFB since inception in 2007 has followed a reasonable liability profile model amongst SFBs, while it has diversified away from relatively volatile Microfinance Institutions (MFI) portfolio. “ESFB has healthy return ratios and trades at lower valuations making it an attractive long-term bet for investors,” says a banking research analyst at Emkay Global Financial Services.

Some experts believe the SFB performs better than its peers. “Their asset and liability profiles are separately managed, which gives them control over the asset quality, unlike larger banks, which sell their asset products to liability customers,” says Vinit Bolinjkar, Head of Research, Ventura Securities. “Considering the low asset base for SFBs, they can be picky about high-quality customer profiles to sell their products,” explains Bolinjkar.

On the cautious side, the analyst at Emkay Global feels that funding cost is typically higher for these banks, as garnering sizeable low-cost Current Account and Savings Account (CASA) will be difficult. Hence, they have to depend on high-cost term deposits.

However, the SFB business model harps on the niche and relatively underserved customer segments with virtual or below investment grade rating, and are thus ready to take a loan at a higher rate, leading to a higher margin.

From the longer horizon, the script prospects look promising. “ESFB can also surprise in terms of delivering higher profitability, which is comparable with the likes of HDFC Bank, Kotak Bank and can deliver Return on Assets (ROAs) in the range of 2 per cent, possibly in the next two to three years,” says Rajiv Mehta, Lead Analyst – Institutional Equities, YES Securities. ESFB is the third IPO under the SFB segment after AU Small Finance Bank and Ujjivan Small Finance Bank.

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