The Promoter of Equitas Small Finance Bank (ESFB) i.e. Equitas Holdings Limited (EHL) was granted the RBI Final Approval on June 30, 2016, to establish a Small Finance Bank (SFB). Subsequently, the Bank was converted to a SFB and it commenced operations on September 05, 2016. Unlike other microfinance companies, it has a diversified loan portfolio and less dependence on microfinance business. The main focus of ESFB is on financially unserved and underserved customers.
Positives : (1) The bank is well capitalized (CAR – 23.6% & CET 1 – 22.4% as on Q1FY21, (2) Bank has diversified portfolio ( SME- 42%, Vehicle - 24%, MFI- 24%, Housing – 4% and remaining others, (3) It has highest number of outlets compared to all SFBs. (4) ESFB has the best CASA ratio among SFB (ESFB – 20.5%, Ujjivan SFB – 12% & AUSFB -14.5%.
Concerns: (1) ESFB for FY20 reported RoA/RoE of 1.4%/9.8%, which we believe is lower; whereas listed players Ujjivan SFB reported RoA/RoE of 2.2%/14%, AU SFB reported RoA/RoE of 1.6%/15.6%, (2) Asset quality ratio is weak compared to listed peers. For FY20, GNPA of ESFB was 2.7%, for Ujjivan and AUSFB it was 1% and 1.7%, respectively, (3) ESFBs provision coverage ratio is at 48% vs. That of listed peers at >65%, (4) 36.2% of the loan book is under moratorium as on August 31, 2020, which would increase possibility of jump in GNPA and will impact return ratios adversly.
Market outlook and valuation: At the upper end of the price band, Equitas SFB demands Adj. PB of 1.26x post considering fresh issue. Though the bank has diversified loan book and best CASA ratio among SFBs, the return ratios are subdued with GNPA above 2.5% for last 3 years. Our concern for Equitas SFB is fresh formation of bad loans from moratorium book that would keep provisions high and return ratios compressed. We believe invesors should wait for price discovery before making any investment decision. Considering above factors, we recommend NEUTRAL rating for the IPO
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