Recommendation from Banking Sector

This section gives a recommendation of a stock having stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon[EasyDNNnews:PaidContentStart]

returns rather than maximising nearUjjivan Small Finance Bank : FROM MICROFINANCE TO A BALANCED RETAIL BANK

HERE IS WHY
✓  Improving asset quality
✓  Healthier loan and liability mix
✓  Sustainable growth visibility

India’s banking and financial services sector is entering a more balanced phase of growth, supported by steady economic expansion, improving credit demand, and a gradual easing in liquidity conditions. As macro volatility moderates, lenders are increasingly shifting focus from aggressive balance-sheet expansion to sustainable profitability and asset quality. Within this environment, small finance banks (SFBs) are steadily evolving beyond their original financial inclusion mandate into more diversified retail banking franchises. Ujjivan Small Finance Bank (Ujjivan) stands out as a key beneficiary of this transition, leveraging its strong microfinance legacy while progressively reshaping its business model.

Originally built on a microfinance-led lending franchise, Ujjivan has undertaken a deliberate shift to improve portfolio stability and earnings durability. The bank has been steadily increasing the share of secured lending across segments such as affordable housing, micro mortgages, MSME, gold loans, and vehicle finance, thereby reducing Reliance on unsecured microfinance loans. This transition is structural in nature and aimed at lowering portfolio volatility and improving risk-adjusted returns rather than maximising nearterm growth. Ujjivan delivered an improved performance in Q2 FY26. Net Interest Income rose to ₹922 crore from ₹856 crore in Q1 FY26, marking 7.7 per cent quarter-on-quarter growth, supported by steady loan growth and lower funding costs. Cost of funds eased to 7.3 per cent from 7.6 per cent, reflecting better liability management. Net profit increased to ₹122 crore from ₹103 crore, up 18.2 per cent quarter-onquarter, aided by stronger operating profitability and lower stress-related provisioning as slippages declined to ₹278 crore.

Profitability metrics remained healthy during the quarter. Net Interest Margins stood at 7.9 per cent, supported by a favourable loan mix and gradual improvement in the funding profile. Asset quality remained stable, with Gross Net Performing Assets (NPAs) at 2.5 per cent and Net NPAs at 0.7 per cent.

Importantly, the micro-banking portfolio continued to show resilience, with on-time (on or before due date) collection efficiency averaging 99.48 per cent, indicating stable borrower behaviour and limited incremental stress.

On the business front, the bank reported its highest-ever disbursements of ₹7,932 crore, representing growth of 47.6 per cent YoY Growth continued to be driven by secured lending. The secured loan book rose to ₹16,173 crore, forming 47 per cent of the total loan book, compared with 35 per cent in Q2 FY25. This steady improvement in loan mix underscores the bank’s progress in portfolio diversification and balancesheet de-risking.

Looking ahead, Ujjivan’s outlook remains anchored in quality-led growth. Incremental loan growth is expected to be led by secured segments, which should help keep credit costs under control and reduce earnings volatility. On the liability side, the continued focus on CASA-led deposit growth and a stronger retail funding mix should support margins and improve funding stability over time. As asset quality stabilises and operating leverage improves, return ratios are expected to trend higher gradually.

At around 1.8x price-to-book (P/B), compared with a three-year median (P/B) of ~1.6x, the stock trades at a modest premium. However, given the improving asset quality, rising share of secured loans, strengthening liability profile, and visible transition towards a more balanced retail banking franchise, the valuation appears justified. With return ratios expected to improve steadily, we recommend a BUY.

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