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Robust growth to drive continued re-rating

Asset quality to improve further; estimate RoA to sustain at >2%

* EQUITASB reported strong profitability in FY23, with RoA expanding to 1.9% (avg. of 2.2% in 2HFY23). It was driven by steady margins, healthy loan growth and controlled credit costs.

* The bank focuses on building a diversified loan book, with small business loans (SBL), vehicle finance, microfinance (MFI) and housing finance being the key robust 27% CAGR in loans over FY23-25.

* EQUITASB has made good progress in building a granular liability franchise, with a rising mix of retail deposits. The CASA mix is healthy at 42.3%. We expect deposit traction to remain strong even as the CASA mix declines further.

* It has demonstrated a strong improvement in asset quality, with X bucket collection efficiency improving to pre-Covid levels and GNPA/NNPA ratios moderating to 2.8%/1.2% as of 4QFY23. We expect asset quality ratios to improve further and expect PCR to improve to 70% by FY25 (over 1,400bp PCR improvement in FY23).

* We estimate EQUITASB to deliver FY25E RoA/RoE of 2.1%/16.7% and value it at INR105 (1.7x Mar’25E BV). Reiterate BUY.

Growth momentum remains steady; estimate 27% loan CAGR over FY23-25

EQUITASB reported a robust loan growth of 33% YoY in FY23. The bank has been focusing on building a diversified loan book, with SBL, vehicle finance, MFI and housing finance being the key business segments. It has posted a 25% CAGR in AUM over the past two years, led by steady trends in vehicle finance, SBL and MFI segments (~80% of total AUM). Housing finance saw a 70%+ CAGR, albeit on a low base. The bank expects a steady ~40% CAGR in affordable housing over FY23-25. EQUITASB sees a huge opportunity in vehicle finance and expects the segment to be one of the key drivers of loan growth while SBL and MFI maintain healthy growth traction. We estimate a robust 27% CAGR in loans over FY23-25.

Business mix well diversified; MFI mix to remain in 15-20% range

The bank has made good progress in reducing the concentration of MFI loans, which moderated to 18.8% of AUM in FY23 from 53.6% in FY16. The mix of vehicle loans has remained broadly stable at ~25%, while the mix of SBLs has increased to 36% from 18% over the similar period. The mix of housing loans too has increased and now constitutes ~10% of AUM. Disbursements in the MFI and vehicle loans have started to pick up. Thus, the bank expects MFI mix to remain broadly stable, with MFI contributing ~15-20% of AUM. However, it expects the vehicle loan mix to increase further. The bank intends to grow the unsecured personal loan and credit card segments by focusing on the prime segment; however, it aims to limit the overall mix of unsecured loans to <20% so as to maintain stability in the overall book. We believe that the bank has been successful in building a diversified franchise, which will enable it to report healthy loan growth.

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