Review of Capital Small Finance Bank’s initial public offering (IPO)

Capital Small Finance Bank is preparing for an initial public offering (IPO) worth 100 billion won. 523 Cr, scheduled to be released on the 7th^Day February 2024. This issue closes on the 9th.^Day Listed on the exchange on February 14th^Day February 2024. In this article, we will look at the 2024 Capital Small Finance Bank IPO review and analyze its strengths and weaknesses. Read on to find out!

Review of Capital Small Finance Bank’s initial public offering (IPO)

About Us

Capital Small Finance Bank is India’s first small finance bank that started operations in 2016. Before becoming Capital Small Finance Bank, Capital SFB had been in the banking industry as a non-NBFC microfinance institution since 1999.

The bank mainly provides agricultural loans, small and medium-sized enterprises, trade loans and residential mortgage loans. Over the years, the company expanded its operations in northern India in Punjab, Haryana, Rajasthan, Delhi, Himachal Pradesh and the Union Territory.

As of September 30, 2023, the bank had 173 branches and 175 ATMs across five states and one union territory. 76.30% of its branches are in rural and semi-urban areas, catering to 75.75% of its total customers across 24 districts.

The bank has a diversified portfolio comprising 99.85% of secured loans, with average gross NPAs of 2.52% and net NPAs of 1.3% as of September 2023. Capital SFC maintains a CASA ratio of 41.88%, and 97.9% of total deposits are deposits. Retail sector.

Industry introduction

RBI had set up the Small Finance Bank in 2015 to expand financial inclusion, especially in rural and semi-urban areas. Of the 10 institutions that received my approval, 8 were microfinance institutions.

Many microfinance institutions are licensed based on their experience serving low-income populations.

Players like AU SFB and Capital SFB are the only two players who are not NBFC-MFIs eligible for SFB licence. They aimed to approve loan accounts in neighboring regions, mobilize rural savings and make them available for local investments, and promote financial inclusion.

Since then, small finance banks have recorded a CAGR of 10% in semi-urban and rural areas from FY15 to FY23. Their overall deposit base has doubled to around Rs. 37,500 Cr as of FY19. The CAGR further increased at ~48%, reaching Rs. 1.6 Lakh Cr in FY23. Going forward, CRISIL MI&A expects deposits from SFBs to grow at a CAGR of 40-45% by FY25.

AUM of small finance banks recorded a CAGR of 29% during FY18-23. CRISIL MI&A expects the sector’s loan portfolio to witness a strong CAGR of 22-24% from FY23 to FY25 as most SFBs are likely to complete the transformation phase and benefit from operating leverage.

Gross non-performing assets hit a record high of 3.8% in FY20 due to loan defaults due to the pandemic. However, these NPAs continued to decline and hit an all-time low of 2.8% in FY23. Currently, the Eastern and Southern regions have the highest NPAs at 3.4%. The North East region has made tremendous progress with NPAs reducing from 6.6% and 6.3% to 2.2% and 3.4% respectively.

Capital Small Finance Bank – Finance

Capital Salt Finance Bank received interest of 5 million won. 676 Cr in FY23, up 17% from Rs. 578 Cr in FY22 and is growing at a CAGR of 15% from FY21.

The interest paid on customer deposits was 5 million won. 354 Cr in FY23, up just 9.6% from Rs. 323Cr in FY22. Since FY21, interest expenses have only grown at a CAGR of 6%.

This has enabled the company to continue expanding its net interest income at a CAGR of 27% at Rs. 198 Cr in FY21 to Rs. 322 Cr in FY23.

The company’s deposits increased by 8.51% at Rs. 6560 Cr in FY22 to Rs. 7000 Cr in FY23 and expanded at a CAGR of 12% since FY21. However, advances or loans provided have grown aggressively by 17% from Rs. 4635 Cr in FY22 to Rs. 5429 Cr in FY23. Advances have grown at a CAGR of 21% since FY21.

main players

Comparing Capital SFB with its peer banks, we find that it is the smallest small finance bank among its listed peers in terms of revenue. However, in terms of profits, the bank is performing better than Shusyoday SFB.

In terms of return on equity, the bank is performing quite well, right behind Ujjivan and ESAF SFB. Captial’s GNPA of 2.77% is slightly higher than the industry average of 2.76%.

Company Strengths

1. Retail-focused banks with high CASA: The bank maintained a high CASA ratio of 42% in FY23. A high CASA means the company has a high proportion of deposits, which means its borrowing costs are low.
2. Secured Loan: 99.85% ~ Of The bank’s loan portfolio is collateralized by real estate.
3. Metric improvements since switching to SFB: Since Capital achieved SFB status, the bank’s deposits and loans have increased significantly, along with improved profitability and cost-to-income ratios.
4. Customer-centric approach: SFB has a deep understanding of who its customers are and its primary focus is middle-income customers.
5. Consistent Performance: Since SFC’s inception, Capital has maintained a consistent performance in terms of deposit and advance growth and has improved profitability by improving its cost-to-revenue ratio.

company’s weaknesses

1. Various regulatory requirements: As a small finance bank, Capital is subject to various regulations under the Banking Regulation Act. Banks may be subject to fines if they do not comply.
2. Risks of NPAs: Due to the microfinance nature of these banks in rural and semi-urban areas, economic downturn poses severe challenges to SFB assets such as FY20.
3. Fierce competition: The growing focus on financial inclusion has led to increased competition with several SFBs expanding aggressively in rural and semi-urban areas.
4. Focus on Lending Risks: As an SFB, Capital derives a significant portion (70%+) of its revenue from lending activities. Loan fallout or loan defaults can have a serious impact on a company’s earnings potential.
5. Dependence on rural economy: The success or failure of Captial SFC is directly related to the development of the rural economy. Economic crises or natural disasters affecting rural and semi-urban areas can significantly harm book value.

Capital Small Finance Bank – GMP

Shares of Capital Small Finance Bank Ltd were trading at a premium of 10.68% in the gray market on February 5, 2024. The stock in Gray Market was trading at Rs 518. This gives a premium of Rs 50 per share to the ceiling price of Rs 468. .

Key IPO Information

promoter: Sarvjit Singh Samra, Amarjit Singh Samra, Navneet Kaur Samra, Surinder Kaur Samra and Dinesh Gupta

Book Operations Lead Manager: Nuvama Wealth Management Ltd, DAM Capital Advisors Ltd and Equirus Capital Pvt Ltd.

Proposal registered by: Link Intime India Pvt Ltd

purpose of the problem

1. 450 Cr from the net proceeds from the rupee IPO will be used for Tier-I capital financing of the bank to comply with RBI’s capital requirement norms.

conclusion

Investing in the Capital Small Finance Bank IPO provides investors with an opportunity to gain exposure to India’s high-growth small finance banking sector. With its focus on underbanked rural and semi-urban markets, Capital SFB is well positioned to tap into the vast untapped potential.

The bank has shown strong financial growth, including increased net interest income, growing loan book and improving profitability indicators. However, as a small finance bank, Capital SFB is vulnerable to asset quality risks and regulations.

This is about Capital Microfinance Bank. Before I end this post, I would like to let you know on the 7th.^Day In February, Jana Small Finance Bank will also offer equity to the market. Both Capital and Jana are scheduled to be listed on the exchange on the 14th.^Day February.

So, I hope you do your IPO research well and compare the two banks to make the best choice. Which bank would you like to bet on? Let us know in the comments below.

Written by Nasir Hussein

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