Risk aversion mars growth; bank transition drags profits lower

* In a quarter marred by uncertainty over the MFI portfolio, Equitas’ PAT fell 85% YoY/QoQ to INR69m (~82% miss). Flat AUM QoQ, interest reversal on MFI loans (INR38m) and a decline in high-yielding loans led to net interest income miss of 7% (-4% QoQ, but +30% YoY). NIM contracted 70bp/140bp QoQ/YoY to 9.8%, and high-yielding MFI AUM (~50% of AUM as of 3Q) declined 7% QoQ.

* Continued investments in branches (284 in 4Q v/s 112 in 3Q) led to opex increase of 85% YoY (+17% QoQ) to INR1.95b (in-line). The bank also onboarded 600+ (+23% QoQ) branch banking employees in 4QFY17.

* GNPA in MFI portfolio, including RBI dispensation (INR620m), stands at INR100m. However, Equitas has proactively classified INR580m worth of accounts as NPA, taking NPA in MFI portfolio to INR680m (2% of MFI AUM). Total at PAR stress on AUM is INR1.9b (INR1.45b on books), with Equitas confident of recovering 50%, leading to total loss of ~INR1b. It already has INR540m of provisions (INR350m specific+INR190m floating) on this portfolio.

* Overall GNPA stood at 3.5%; however, excluding the proactive impaired account recognition, it stood at 2.5%. MFI PAR at >90 DPD was 2.7% v/s 8% for the industry. Collection efficiency deteriorated to 95.4% v/s 98.4% in 3Q owing to a drop in collection efficiency in Maharashtra (77% v/s 93% in 3Q).

* FY17 highlights: a) AUM growth was moderate at 17% YoY, as the bank chose to be cautious in MF lending (flat YoY). UCV/micro LAP grew 28%/50% YoY. b) Garnered deposits of INR18.9b; CASA deposits were INR3.3b.

* Valuation view: Target is to reduce MFI share in overall loans to ~30% by FY18. This would be partially offset by high growth in secured products (e.g. micro LAP, VF) and new products (e.g. housing, business, gold, agri loans). We expect near-term recalibration of the growth strategy to yield positive results over medium-to-long term. Fast paced liability branch set-up, a strong BC reach and a large captive MFI customer base will enable it to recalibrate the liability side, lowering CoF and growing cross-sell and fee income. Maintain Buy with TP of INR210.

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