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Set to deliver a strong expansion in profitability

Our view

Equitas SFB’s performance was largely in-line adjusted for reversal of excess provision for gratuity/leave salary worth Rs306mn and the additional std. assets provisions of Rs261mn. Gross Adv. grew 5% qoq with accretion being driven by SBL-LAP, Affordable HL, MFI and New VF portfolios. The bank is targeting to get back to its pre-Covid levels growth rate of 30%. Momentum in CASA and Retail TD continued with CASA ratio improving further to 52% and share of Retail TD at 37%. Despite 30 bps qoq decline in CoF on higher CASA % and reduction in TD cost, NIM was stable at 9.1% due to increased BS liquidity, bulk of the advance growth coming in later part of the quarter and strong traction in lower yielding products. Cost/income ratio improved by 300 bps even adjusting for reversal of excess provision for gratuity/leave salary.

Higher loan write-offs of Rs1.9bn (Rs1.3bn in Q3) drive GNPA reduction to 4.1%; but consequently, PCR declined further to 42.7% from 47% as of Dec. Gross slippages were higher at Rs4.1bn (70% from OTR book) v/s Rs2.7bn in Q3; upgrades and recoveries were stronger too at Rs2.4bn v/s Rs1.5bn in Q3, reflecting better operating environment. Total OTR pool came down from Rs17.6bn as of Dec to Rs15bn as of March, and it witnessed significant forward flow with NPL bucket at 20% (9% as of Dec) and SMA 1 & 2 at 27% (Rs4.1bn). However, only Rs370mn of std. OTR pool is assessed as high-risk (made no payments during Q4) by the management, and not much stress flow is estimated outside the OTR book. Credit cost was at annualized 2.5%, driven in large measure by OTR delinquency flow. Bank has guided for 1.5% credit cost for FY23 and further moderation to 1.1-1.3% in subsequent years. It intends to raise PCR above 60% over a couple of years, and recent changes in provisioning policy would enable this.

Key monitorables in coming quarters would be trend in slippages from OTR pool, asset growth and PCR. With fresh delinquency creation normalized (99% CE in X bucket across products), the bank’s focus has shifted back to growth. Asset growth and delinquency trends have a significant bearing on bank’s cost/income ratio, and both are set to improve. We see significant profitability expansion over FY22-24; RoA/RoE estimated to reach 2.4%/17%. Valuation is undemanding at 1.3x FY24 P/ABV. Reiterate BUY with 12m PT of Rs75.

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