Buy Equitas Small Finance Bank Ltd For Target Rs. 75 - Yes Securities
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Result Highlights
* In Q4 FY21, ESFB experienced incremental normalcy in business volumes (except in Microfinance) and achieved pre‐Covid collections in the current bucket across products and an improvement in billing efficiency and overall collection efficiency (incl. arrears).
* Despite the drag from Microfinance business (cautious disbursements + w/off of Rs1.7bn), overall growth in gross advances was healthy at 3.5% qoq/17% yoy with sustained strong new business originations in Small Business Loans, Vehicle Finance, Home Loans and MSE Finance.
* Encouraging collection performance and w/off of MFI loans led to a sharp correction in NPLs (Gross/Net NPLs fell to 3.6%/1.5% v/s 4.2%/1.7% as of Q3). Annualized credit cost stood lower than Q3; the bank maintained PCR near 60%, but doesn’t hold any contingency buffer for second Covid wave.
* With sustained acceleration in liability customer acquisition, the bank made significant progress in further granularizing its deposits mix. CASA + Retail TDs’ share jumped to 70% of customer deposits from 60% as of Q3, causing incremental decline in funding cost.
Our view –
Sustaining asset quality resilience in the second wave will be key: ESFB’s asset quality and growth resilience surprised positively during the first pandemic wave. The bank is having a strong capital position (Tier‐1 at 23%) and a comfortable PCR on existing NPLs (improved over past four quarters).
NIM should be structurally better in ensuing quarters versus Q4 FY21 level (impacted by int.‐on‐int. reversal and lumpy slippage recognition); with product mix expected to stabilize and liability mix expected to improve further. Sweating of branch banking and digital investments would cause cost/income ratio to improve. Retain BUY on ESFB with a 12m PT of Rs75, as we see the bank delivering significant RoA/RoE expansion over FY21‐24. Valuation at 1.5x FY23 P/ABV is undemanding for 16‐18% ABV compounding over the next three years.
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