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Collection efficiency improving; Business growth improving

Restructuring increased to ~2.6% of loans; Credit cost to stay elevated

* Equitas Small Finance Bank reported PAT of INR1.1b (higher than our estimate) driven by higher PSLC fee income and lower provisions. Non-MFI AUM growth came in at 25% YoY while MFI portfolio declines further. On the liability front, Deposit growth momentum strong with CASA ratio improved to 34%.

* On the asset quality front, higher write-offs of INR1.7b in the MFI portfolio resulted in Asset quality ratios improvement. Also, Collection efficiency for Mar’21 improved to 108.5% (v/s 105.4% in Dec’20). The Bank holds cumulative provision (standard asset + floating + provision for NPA) of 2.6% of advances. On the other hand, restructuring increased to ~2.6% of loans. We increase earnings estimates for FY22/23 by 5%/3%. Maintain BUY.

Lower provisions aided PAT beat; Asset quality ratio improves

* 4QFY21 PAT stood at ~INR1.1b (~162% YoY, 10% above estimate) led by higher PSLC fee income and lower provisions (23% QoQ decline). The bank holds a management overlay provisions buffer of INR1.5b (0.9% of loans). For FY21, NII/PPoP/PAT grew at 20%/48%/58% YoY.

* NII grew at 6% YoY (lower than estimate) with NIM’s declined sharply by 90bp to 7.57%. On the other hand, other income grew 22% QoQ mainly led by higher PSLC fee income.

* Opex growth was at 22% YoY resulting in an increase in the C/I ratio to 60.2% (vs 56.4% in 3QFY21). Overall, core PPoP growth came at 33% YoY.

* Total AUM grew ~17% YoY (3% QoQ) to INR179b, affected by 7% QoQ decline in the MFI portfolio and thus the share of MFI declined to 18.1% (v/s 20% in 3QFY21 and 23.5% in FY20). On the other hand, Non-MFI grow came strong at 25% YoY (~6% QoQ) led by 27% YoY growth in small business loans and MSE finance grew at 76% YoY. Vehicle finance also grew at 20% YoY. Disbursements during 4QFY21 stood at INR25b (3% QoQ)

* Deposits (excluding CD) growth came strong at 58% YoY to INR163b led by 154% YoY growth in CASA (45% QoQ growth in SA deposits) while TD grew 26% YoY resulting in improvement in CASA ratio to 34% (+900bp QoQ).

* On the asset quality front, GNPA/NNPA ratio improved to 3.59%/1.52% (v/s 4.16%/1.71% pro-forma in 3QFY21). Thus, PCR improved to 58.6% (v/s proforma 57.3% in 3QFY21). The improvement in asset quality mainly due to higher write-offs in the MFI portfolio. Further, total restructuring under the resolution framework for COVID-19 stands at INR4.3b (~2.6% of loans). Bank holds cumulative provision (standard asset + floating + provision for NPA) of 2.56% of advances.

* Collection efficiency for Mar’21 improved to 108.5% (v/s 105.4% in Dec’20) while the billing efficiency improved to ~91.1% (vs 88.7% in Dec’20). Further, collection efficiency improves among all key segments.

Highlights from management commentary

* ~9% total customers have not paid Mar’21 EMI’s includes 3% from NPA’s while the rest 5%-6% of the customers from the SMA overdue category.

* CASA growth remains strong and acquiring 40k-50k customers per month.

* Before the pandemic, 70% of the incremental business is from NTB (New to customers) while currently focuses on existing customers resulted in increase in Average ticket size across segments.

Valuation and view

Equitas has reported a steady AUM growth with strong trends in the Non-MFI segments in both Small Business loans and Vehicle Finance segment. Also, deposit growth remains robust led by healthy traction SA deposits. On the asset quality front, collection efficiency has improved across segments while higher write-offs resulted in sequential improvement in Asset quality ratios.

However, restructuring increased to 2.6% of loans and the impact of localized lockdown to be a key to watch in the near term. We increase our earnings estimate for FY22/23 by 5%/3% and maintain credit cost at 2% for FY22E. Overall, we maintain our TP of INR105 (1.0x FY23E ABV) with a Buy rating.

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