Buy Equitas Small Finance Bank Ltd For Target Rs.75 by Motilal Oswal Financial Services Ltd
Sudden leadership exit casts shadow over healthy earnings Raises RoA guidance to ~1.35% for FY27
* Equitas SFB reported 2QFY27 PAT of INR2.2b (up 19% QoQ, 14% beat), supported by healthy other income and lower-than-expected provisions.
* NII grew 33% YoY/flat QoQ to INR10.3b (marginally below estimates). NIM contracted 55bp QoQ to 6.69%, primarily due to excess liquidity and higher funding costs. CoF increased 7bp QoQ.
* Net advances grew 29% YoY/5% QoQ to INR468b. Deposits grew 19% YoY/7% QoQ to INR525b. CASA ratio improved to 26% (vs. 25.1% in 1Q), while the CD ratio moderated to 89% from 91.3% in 1QFY27.
* Asset quality improved, with GNPA/NNPA ratios declining 13bp/1bp QoQ to 2.29%/0.70%. PCR moderated to 70.1%. Credit cost declined to 0.94% from 1.37% in 1QFY27 (1.12% adjusted for ARC sale).
* FY27 RoA guidance is raised to 1.35% from 1.2%, supported by expected NIM recovery and moderating credit costs. Management expects an 18- 20bp improvement in NIM by 4QFY27.
* Slippages increased to INR4.6b from INR4.0b in 1QFY27 (up 16.2% QoQ).
* We increase our earnings estimates by 8.0%/2.5% in FY27/FY28 and estimate RoA/RoE of 1.3%/14.8% by FY28E. Reiterate BUY with a revised TP of INR75 (1.2x FY28E ABV).
Highlights from the management commentary
* MD & CEO Mr. P.N. Vasudevan has expressed his intention to step down, citing investor concerns regarding the perceived conflict of interest arising from his family's investments in an NBFC.
* The bank expects the entire succession process, including regulatory approval and takeover, to be completed in 3-4 months, with candidate shortlisting expected within a month.
* FY27 RoA guidance is revised to ~1.35% from ~1.2%, supported by improving NIMs, moderating credit costs and operating leverage.
* NIM is expected to improve by ~18-20bp by 4QFY27 from the 2QFY27 level of 6.69%, supported by liquidity deployment.
* CoF is expected to increase by another ~8-10bp in 3QFY27 due to deposit repricing, with no immediate plans for further deposit rate hikes.
Valuation and view: Reiterate BUY with a revised TP of INR75
EQUITASB reported a steady quarter, with healthy earnings supported by higher other income and lower provisions, despite a PPoP miss. NIM contracted 55bp QoQ to 6.69%, primarily due to excess liquidity and higher funding costs. The bank expects an 18-20bp recovery in NIM by 4QFY27 as surplus liquidity gets deployed, though further CoF repricing may exert near-term pressure. Advances growth was healthy, led by traction across SBL, VF, HF and other secured segments, while deposit growth improved with a moderation in the CD ratio. Asset quality trends were encouraging, with improving GNPA/NNPA ratios and moderation in credit costs. Management raised its FY27 RoA guidance to 1.35% from 1.2%, supported by margin recovery, benign credit costs and operating leverage. The impending MD & CEO transition remains a key monitorable, although management expects no disruption to business continuity. We increase our earnings estimates by 8.0%/2.5% in FY27/FY28 and estimate RoA/RoE of 1.3%/14.8% by FY28E. Reiterate BUY with a revised TP of INR75 (1.2x FY28E ABV)
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