Equitas Small Finance Bank (ESFB) is a mass market focused small finance bank (SFB), providing banking products and services to unserved and underserved segment. It is the largest SFB in India in terms of number of banking outlets and second largest SFB in India in terms of AUM and total deposits as on FY19. As of June 30, 2020, the bank had 856 banking outlets and 322 ATMs spread across 17 states and union territories in India.
ESFB has a diversified portfolio with advances growing at 34% CAGR from FY18-20 to | 13747 crore (| 14389 crore as on June 2020). During the same period, deposits grew at 39% CAGR to | 10788 crore (| 11787 crore as on June 2020). Asset quality has remained steady with GNPA ratio at 2.68% and NNPA ratio at 1.48% as on June 2020. Operationally, conversion into SFB led to rise in cost to income ratio (67.2% in FY20). Earnings came in at | 243.6 crore in FY20 and | 57.7 crore in Q1FY21.
Well diversified advances, focus on liabilities bode well
ESFB has been relatively successful in diversifying its loan portfolio reducing dependence on MFI. A deep understanding of the market enables it to cater to customers leading to 39.1% CAGR in AUM in FY18-20 to | 15367 crore. As per Crisil, the SFB industry is expected to grow advances at 25% CAGR in FY19-22E to touch | 1.4 lakh crore. ESFB deposits grew at 39% CAGR in FY18-20 to | 10788 crore. Retail deposits to total deposits in Q1FY21 were at 46.4%. With a substantial network of banking outlets and focus on technology, ESFB is placed to keep growth trajectory in deposits abated.
Steady asset quality; leveraging of operation key for RoA
ESFB has maintained its asset quality with GNPA ratio at 2.68% in Q1FY21 (absolute GNPA at | 417 crore). PCR for Q1FY21 was at 48.8%. Moratorium book reduced from 51.17% in June 2020 to 36.24% by August 2020. Cost to income ratio remains high led by conversion into SFB wherein focus on efficient utilization of resources would lead to improvement in earnings.
Key risks and concerns
* Continuing impact of pandemic may affect business negatively
* Deposit base dependent on limited number of customers
* New products, entry in new geography pose risk of NPA
Priced at P/BV of 1.2x Q1FY21 (post issue) on upper band
ESFB had strong advances growth along with maintaining asset quality. Unserved and underserved customers as target offer a vast opportunity for business growth. We have a SUBSCRIBE recommendation on the stock. At | 33, the stock is available at ~1.2x Q1FY21 P/BV (post fresh issue) and at ~16.3x P/E at Q1FY21 PAT (annualised basis).
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