IGI Logo

A quarter of higher slippages, softer growth, and one-time PCR augmentation

Equitas SFB’s earnings performance in Q1 FY25 was impacted by 1) creation of Rs1.8bn Floating Provision to increase PCR to 70%, 2) persistent elevated slippages in MFI and increased slippages in VF portfolio and 3) sequential contraction in MFI book and deceleration of growth in AHL and VF portfolios. Overall growth in the bank’s loan portfolio moderated to 1.6% qoq/17.8% yoy with disbursements declining by 21% qoq/15% yoy. Business activity was somewhat impacted by heatwave/elections and the dip in collections. Gross slippage rate for Q1 FY25 was higher than Q4 FY24 at 4.5%, and the 30-90 dpd pool rose from 3% to 3.9%. Hence, the credit cost was higher at 1.44% (vs earlier guidance of 1.25%) without considering the augmentation of PCR. NII growth was slightly better-than-expectations with the loan book yield improving on the back of higher disbursements yield in non-MFI segments.

Management reasonably confident on growth, but watchful of MFI asset quality and overall credit cost

While July X-bucket CE in MFI segment was similar to June, the bank is hopeful of recovery taking shape in coming quarters. It is also of the view that VF delinquency flows and NPL resolutions would improve. Hence, gross slippage rate is expected to abate and GNPL level is estimated to stabilize in H2 FY25. The credit cost range for the year is being reassessed by the management in the wake of some uncertainty over MFI collection trends. The PCR would be maintained at 70% in the future and the NNPLs at below 1%. Disbursements/sequential growth in SBL, AHL and VF is expected to accelerate through the remainder of the year, while MFI disbursements are expected to moderately pick-up only in the second half of the year. Bank is reasonably confident about achieving 25% loan growth expecting much higher growth in non-MFI products.

Earnings cut has been significant; valuation recovery could be slow - downgrade to ADD

Our earnings cut of 32%/12% for FY25/26 has been a function of 1) PCR augmentation provision incurred in Q1 FY25 2) expectations of elevated slippages and credit cost even in Q2 FY25, 3) higher provisioning rate for incremental slippages, 4) calibration of growth estimate for current year due to meek start and MFI issues, and 5) somewhat detrimental impact on near-term margins from declining MFI share in overall loans. In FY26, which can be a usual year and may see a margin recovery, we estimate RoA/RoE at 1.8%/15.5%. While valuation is undemanding at 1.4x FY26 P/ABV on revised figures, the recovery in valuation could be slow and hinged on Q2 FY25 performance being better than current expectations. Downgrade the stock to Hold with lowered 12m PT of Rs103.

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632.