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Elevated opex, NIM compression impacted earnings; lower credit cost at 2% in Q1FY24

Equitas Small Finance Bank (Equitas) has sustained >2% RoA for the 3 rd consecutive quarter despite >30bps QoQ NIM compression and >5% QoQ increase in cost-income ratio to 66% in Q1FY24. Earnings were primarily boosted by lower credit cost, which settled at ~80bps in Q1FY24 vs 190bps in Q4FY23, reflecting robust credit environment. Credit offtake continued to be strong – gross advances grew 6% QoQ in Q1FY24. Asset quality further improved with GNPL ratio falling to 2.6% vs 2.8% QoQ and PCR improving to 58% vs 57% QoQ. While management highlighted that further NIM compression is likely, benign credit cost and strong momentum would help it sustain RoA at ~2% in FY24. We downgrade the stock to ADD (earlier Buy) with an unchanged TP of INR 100, considering lack of visibility on RoA improving beyond 2% in the near term and sharp run-up in the stock price over the past 3 months.

Q1FY24 financial highlight

Strong credit growth at 6% QoQ led to NII growth remaining robust at 5% QoQ despite >30bps NIM compression. Other income (adjusted for income from ARC sale in Q4FY23) remained flat QoQ at INR 1.7bn led by higher PSLC income. Total operating expenses grew 8% as other staff cost continues to be high at 8% QoQ, while other cost growth remained lower at 7% QoQ during Q1FY24. As a result, cost-income ratio increased to 66% in Q1FY24. The company highlighted that it would continue to invest in technology and new product development like new car loans, credit card, PL etc. and thus CI income may remain elevated at >60% in FY24E-25E. Earnings were boosted by lower provisions at INR 0.6bn vs INR 1.3bn QoQ.

Higher share of fixed asset book and shift towards retail TD to put NIM under pressure in near term

During Q1FY24, NIM compressed by sharp 34bps QoQ to 8.76% due to >30bps QoQ rise in the cost of funds to 6.94% while asset yield expanded marginally by 6bps QoQ to 17.1% in Q1FY24. Considering ~85% of portfolio under fixed rate pricing (limited ability to pass on funding cost increase to borrowers) and another >50bps rise in the cost of funds in Q2FY24, management expects NIM to settle at 8.5% for FY24. Increasing share of retail TD (priced at competitive rates) is likely to drive funding cost higher in coming quarters; however, 40bps improvement in disbursement yields would partially off-set funding cost impact on NIM.

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