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Delivers strong earnings beat; robust liability profile

* Despite the sharp drop in NIM, Equitas SFB reported strong PAT of Rs1.1bn (vs. est. of Rs0.5bn), up 162% yoy, mainly driven by higher fees and contained provisions, partly offset by higher opex. The headline GNPA improved to 3.7% from pro forma GNPA of 4.2% in Q3. However, the restructuring pool has inched up to 2.6% of loans.

* Gross credit growth moderated and was up 17% yoy/3% qoq due to subdued growth in the MFI segment where the bank remains cautious. The share of MFI has now fallen to 18% of loans. Deposit growth has been far stronger, with CASA ratio now being the highest among SFBs at 34% due to focused approach.

* Overall collection/billing efficiency for Mar’21 improved to 109%/91% from 105%/89% in Q3, mainly due to healthy improvement in the VF portfolio (98.9% vs. 96% in Q3). The second Covid wave has impacted business operations a bit with some employees being unwell. However, the impact on growth/asset quality should be limited and manageable.

* The bank steered well through the pandemic and emerged far stronger on the liability front with limited asset-quality impact, delivering healthy RoA/RoE of 1.8%/13% in FY21, which we expect now to improve to 2%/15% by FY23E. We retain Buy and raise TP from Rs52 to Rs74, valuing the bank at 1.9x FY23E ABV (1.5x earlier). On Equitas Holding too, we maintain Buy with a TP of Rs152 (assuming a 25% holdco discount).

Deposit retailization picks up pace but NIMs shrink qoq:

Gross credit growth moderated in the quarter and was up 17% yoy/3% qoq (albeit on a higher base) to Rs179bn, due to subdued growth in the MFI segment as bank continues its cautious stance on MFI. Disbursements, though up 5.4% yoy, remained low in MFI, and the book now contributes 18% of the portfolio, in line with the bank’s strategy to diversify the loan book away from volatile MFI. Deposit growth remained healthy at 52% yoy/3% qoq, mainly driven by strong 174% yoy/45% qoq growth in SA, stemming from the bank’s increased focus on retailization of deposits. Accordingly, CASA ratio improved sharply by 924bps to 34%, while Retail TD grew 54% yoy/7% qoq. However, NIM dropped 90bps qoq to 7.6%, mainly due to NPA recognition, interest wavier and lower LDR.

Improved asset quality but a higher contingent buffer would have been ideal:

The headline GNPA ratio improved to 3.7% from pro forma GNPA of 4.2% in Q3, mainly due to heavy write-offs in the MFI portfolio (Rs1.7bn). The restructured pool inched up qoq to 2.6% of loans from ~2% in Q3. Overall collection/billing efficiency for Mar’21 improved to 109%/91%, compared to 105%/89% in Q3, mainly due to healthy improvement in the VF portfolio (98.9% vs. 96% in Q3). Collection efficiency for SBL too remained healthy at 99.6%, while for MFI at 98.7%. The bank has consumed Rs1.7bn of contingent provisions as NPA recognition begins and is left with a buffer amounting to ~15bps of loans in addition to a reasonable management overlay (provisions over and above IRAC norms) of Rs1.5bn (89bps of loans). We believe that a higher contingent buffer running into a second Covid wave would have been ideal.

Outlook and valuation:

We like Equitas for its healthy asset diversification away from the volatile MFI space, best CASA/liability profile among listed SFBs, capital comfort and reasonable valuations. The overhang of promoter stake dilution is largely over with the RBI’s IWG recommendations, while the transition to Universal Banking License from relatively restrictive SFB license should be a long-term positive for the bank. We retain Buy rating on Equitas SFB with a TP of Rs74, valuing the bank now at 1.9x FY23E ABV (1.5x earlier), factoring in better return ratios and growth trajectory. On Equitas Holding too, we retain Buy with a revised TP of Rs152 (assuming a 25% holdco discount). Key risks: Higher-than-expected NPAs due to the second Covid wave, loss of momentum in CASA flow and management attrition.

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