Capital Small Finance Bank Company is coming up with its IPO issue of Rs. 523 Cr which will open on 7th February 2024. The issue will close on 9th February and be listed on the exchange on 14th February 2024. In this article, we will look at the Capital Small Finance Bank IPO Review 2024 and analyze its strengths and weaknesses. Keep reading to find out!

Capital Small Finance Bank IPO Review

About the Company

Capital Small Finance Bank is India’s first small Finance Bank which began operations in 2016. Before becoming a Small Finance Bank, Capital SFB had been in the banking industry as a non-NBFC Microfinance entity since 1999. 

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 The Bank is primarily engaged in providing agricultural loans, MSME, trading loans, and house mortgage loans. Over the years, the Company expanded its operations in the north Indian states of Punjab, Haryana, Rajasthan, Delhi, Himachal Pradesh, and Union Territory. 

As of September 30, 2023, the bank has a presence in five States and one Union Territory with 173 branches and 175 ATMs. 76.30% of its branches are in rural and semi-urban areas covering 24 districts catering to 75.75% of its total customers. 

The bank has a diversified portfolio of 99.85% of secured loans, with an average gross NPA of 2.52% and Net NPA of 1.3% as of September 2023. Capital SFC maintains a CASA ratio of 41.88%, with 97.9% of total deposits being from the retail segment. 

About the Industry

The RBI established small finance banks in 2015 to expand financial inclusion, especially in rural and semi-urban areas. 8 out of the 10 entities that were given in-principal approval were microfinance institutions.

Many microfinance institutions received licenses due to their experience serving low-income groups.

Players like AU SFB and Capital SFB are the only two that are not NBFC-MFIs to receive an SFB license. They have approved accounts of lending in contiguous districts, mobilizing rural savings and making them available for local investments, and were aimed at furthering financial inclusion. 

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

Small finance banks’ AUM clocked 29% CAGR during FY18-23. CRISIL MI&A expects the sector’s loan portfolio to see a strong 22-24% CAGR from FY23 to FY25 as most of the SFBs have completed the transition phase and are likely to benefit from the operating leverage.

Gross Non-Performing Assets hit an all-time high of 3.8% in FY20, fuelled by pandemic-induced Loan defaulting. However, these NPAs have consistently reduced to report an all-time low of 2.8% in FY23. Currently, the Eastern and Southern region has the highest NPAs at 3.4%. North-Eastern Eastern has shown tremendous progress dropping NPAs from 6.6% & 6.3% to 2.2% and 3.4% respectively.

Capital Small Finance Bank – Financials

Capital Small Finance Bank earned an interest of Rs. 676 Cr in FY23, which increased by 17% from Rs. 578 Cr in FY22 and is increasing at the rate of 15% CAGR from FY21. 

Interest paid out against the customer deposits was at Rs. 354 Cr in FY23, which grew by just 9.6% from Rs. 323 Cr in FY22. Since FY21, interest expenses have increased by just 6% CAGR.

Due to this, the Company was able to sustainably scale its Net Interest Income growing it at the rate of 27% CAGR from Rs. 198 Cr in FY21 to Rs. 322 Cr in FY23.

Deposits of the Company increased by 8.51% from Rs. 6560 Cr in FY22 to Rs. 7000 Cr in FY23 and have scaled at 12% CAGR since FY21. However, Advances or Loans given out have been rather aggressive growing by 17% from Rs. 4635 Cr in FY22 to Rs. 5429 Cr in FY23. Since FY21, Advances have increased by 21% CAGR.

Key Players 

When we compare Capital SFB against its peers, we find that it is the smallest Small Finance Bank amongst its listed peers, in terms of revenue. However, in terms of Profits, the bank performs better than Suryoday SFB.

In terms of Return on Equity, the Bank performs substantially well falling just behind Ujjivan & ESAF SFB. Captial’s GNPAs of 2.77% are slightly higher than the industry median of 2.76%. 

Capital Small Finance Bank IPO Review -RHP of the company
Source: RHP of the company

Strengths of the Company

  1. Retail-focused bank with high CASA: The bank maintained a high CASA ratio of 42% in FY23. Having a higher CASA means that the Company has a higher share of deposits, thereby keeping the cost of borrowing lower.
  2. Secured Loans: 99.85% of the Bank’s portfolio of loans is backed by collateral, secured against immovable properties.
  3. Improving metrics since conversion to SFB: Ever since the Capital got its SFB status, the bank’s deposits & Advances have grown significantly, with improving profitability & cost to income ratio.
  4. Customer-centric Approach: The SFB has a deep understanding of who its customers are and its main focus is on customers from the middle-income segment.
  5. Consistent Track record: Since its inception as an SFC, Capital has maintained a consistent track record in terms of deposits & advances growth, and has improved cost to income ratio thereby improving profitability.

Weaknesses of Company

  1. Various regulatory Requirements: Being a small finance Bank, Capital is subject to multiple regulations under the Banking Regulation Act. Failure to abide by the regulations might result in penalties levied on the bank.
  2. Risk of NPA: Due to the microfinancing nature of these banks in rural & semi-urban areas, a bad time in the economy leads to severe distress in SFBs assets such as in FY20.
  3. Intense Competition: The increased focus on financial inclusion has led to increased competition from multiple SFBs expanding aggressively in rural & semi–urban regions.
  4. Concentration risk towards Lending: Being an SFB, Capital derives a significant portion of its revenue (70%+) from lending activities. The fallout of loans or loan defaults could significantly affect the Company’s earning potential. 
  5. Dependence on Rural Economy: The success or failure of Captial SFC is directly linked to the developments in the rural economy. Any economic crisis or natural disaster affecting the rural & semi-urban areas can significantly erode its book value.

Capital Small Finance Bank – GMP

The shares of Capital Small Finance Bank Ltd traded at a 10.68% premium in the grey market on 5th February 2024. The shares in Grey Market traded at Rs 518. This gives it a premium of Rs 50 per share over the cap price of Rs 468.

Key IPO Information

ParticularsDetails
IPO SizeRs. 523 Cr
Fresh IssueRs. 450 Cr
Offer for Sale (OFS) Rs. 73.07 Cr
Opening date7 February 2024
Closing date9 February 2024
Face ValueRs. 10
Price BandRs. 445 - Rs. 468
Lot Size32 Shares
Minimum Lot Size1 Lot (32 Shares)
Maximum Lot Size13 Lots (416 Shares)
Min. InvestmentRs. 14,976
Listing Date14 February 2024

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

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

Registrar to the Offer: Link Intime India Pvt Ltd

The Objective of the Issue

  1. Rs. 450 Cr obtained as Net proceeds from the IPO will be used towards funding of Bank’s Tier-I capital, to keep up with RBI’s Capital requirement norms.

Conclusion

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

The bank has exhibited strong financial growth, with rising net interest income, loan book, and improving profitability metrics. However, Capital SFB remains susceptible to asset quality risks and regulations as a small finance bank. 

That’s it from us about Capital Small Finance Bank. Before we end this article, we want to let you know that on the 7th of February, Jana Small Finance Bank will also be offering its share to the market. Both Capital as well as Jana will be listing themselves on the exchange on the 14th of February. 

So, we hope you have done your IPO research well and have compared both these banks to pick your best bet. Which bank would you like to bet on? Let us know in the comments below.

Written by Nasir Hussain

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