SBI Securities has issued a "Pick of the Day (Short Term Delivery Call)" for Ujjivan Small Finance Bank Ltd, assessing the company's operational trajectory and investment potential.
Ujjivan Small Finance Bank is a scheduled commercial bank that primarily serves unserved and underserved borrowers across India. Originally established as an NBFC-MFI in 2005, it received in-principle approval from the RBI to operate as a small finance bank in 2015. Historically, the bank's loan book relied heavily on micro banking (group loans), though it has been actively diversifying into secured assets, including affordable housing loans, MSME financing, and vehicle finance, to mitigate unsecured risks.
The bank's financial performance indicators show signs of revitalization. The gross loan book growth has risen to over 20% levels after moderating in FY25, a slowdown attributed to overleverage in the microfinance segment which caused elevated delinquencies. For 4QFY26 (provisional), the gross loan book expanded by 27% year-over-year. This growth was supported by sustained traction in the MFI segment (both group and individual loans), alongside strong growth in the secured loan book. Specifically, group and individual loan disbursements grew approximately 39% and 16% year-over-year, respectively, pointing to a revival within the MFI sector.
Asset quality metrics are showing signs of stabilization as stress in the micro-banking space recedes nationally. Management indicated that the stress is expected to subside across regions by the end of 4QFY26. The State-Mediated Assets (SMA) book as of 3QFY26 declined to 1.6%, influenced by a reduction in forward flows into Gross Non-Performing Assets (GNPA). Furthermore, provisional GNPA improved to 2.3% in 4QFY26 compared to 2.4% in 3QFY26. The Portfolio at Risk (PAR) also showed marked improvement in 4QFY26, standing at approximately 3.5% compared to 4.5% in 4QFY25. The bank has noted superior asset quality among MFI peers during the last industry downcycle, which management attributes to a deliberate strategy of moderating loan disbursements and focusing on efficient collection frameworks. With stable asset quality metrics in the secured book and moderation in forward flows in the MFI segment, management anticipates credit costs to continue tapering down in 4QFY26.
A key development for the bank is the ramp-up in its secured segments. As of 4QFY26 (provisional), the secured loan book represented about 49% of the gross loan book, an increase from 44% year-over-year. This expansion was driven by strong growth in the MSME, affordable housing, vehicle finance, and gold loan segments. The bank's goal is to grow the secured loan book to 65% of total gross loans over the next five years, a move designed to de-link its balance sheet from the cyclical nature of the microfinance industry.
Regarding profitability, margins improved in 3QFY26 due to a decrease in the cost of funds, favorable product mix, and lower interest reversal. The bank anticipates these margins to remain stable in the near term, potentially aided by positive movement in the savings rate.
Investors are presented with the following valuation data:
| Metric | Value |
|---|---|
| CMP (Rs) | 55.5 |
| Accumulation Range (Rs) | 55-56 |
| Target (Rs) | 61.0 |
| Upside Potential (%) | 10.0% |
| Duration | 6-12 Months |
In a potential strategic move, Ujjivan applied for a Universal Banking License in 2025, signaling an intent to evolve from an SFB structure to a full-service commercial bank. An approval from the RBI could benefit the bank by deepening its deposit franchise to support the cost of funds, while simultaneously eliminating constraints related to ticket size and easing Priority Sector Lending (PSL) mandates for optimized capital allocation.
The analysis provided by SSL Research suggests that recent financial performance, overall corporate governance, and stock price movement are positive factors driving the recommendation.
For short-term investors, a previous recommendation history shows a "BUY" rating with a target price of 66 on January 16, 2026. The current recommendation from the research desk pertains to a short to medium term holding period.
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