Add Equitas Small Finance Bank Ltd for the Target Rs 75 by Emkay Global Financial Services Ltd
Equitas SFB (EQUITASB) hosted its first analyst meet, outlining its business strategy and medium-term outlook. The bank expects credit growth momentum to sustain at >20%, with its asset mix largely tilted toward secured lending while maintaining MFI exposure at ~10%. Asset quality remains under control as MFI stress is largely behind, but the bank remains watchful of the West Asia conflict. The bank also expects margins to remain range-bound at 7% amid rising CoF, but believes steady improvement in operating leverage and credit costs (1.2-1.3%) should increase RoA to 1.2-1.25% in FY27, with an exit quarterly RoA of 1.5%. We believe the bank’s diversified loan portfolio, along with the GNPA ratio being below 3%, should make it eligible to apply for a Universal Bank License, thereby supporting the stock’s rerating. We maintain ADD and TP of Rs75 (valuing the bank at 1.2x FY28E ABV).
AUM growth to sustain at >20%
EQUITASB has diversified its business model by transitioning toward a secured lending portfolio, with secured assets now accounting for 88% (vs 75% in FY20) of advances. While stress in the MFI segment weighed on overall AUM growth in recent periods, the management prudently reduced MFI exposure to ~10% of advances and expects to maintain it at similar levels going forward. Having traditionally catered to informal and semi-formal customer segments, the bank is now looking to expand into the mass formal segment as its landed CoF continues to moderate. Further, AUM growth accelerated to 21% in FY26, which the management expects to sustain at >20% in FY27.
Deposit mobilization remains a challenge; landed CoF continues to moderate
The management highlighted that deposit mobilization remains a key challenge for SFBs, with deposit growth remaining modest at 8% YoY in FY26, resulting in a higher reliance on borrowings to support credit growth. However, EQUITASB has strengthened its liability franchise, with retail deposits constituting ~68% of total deposits and ~88% of bulk term deposits being non-callable. The recently launched FCNR deposit business has also gained traction, crossing USD29mn. Consequently, landed CoF declined sharply from 12.7% in FY25 to 8.2% in FY26, with the management targeting further improvement over the next 3–5 years. The bank also plans to add 10–15 branches annually, focusing on a resource-led expansion strategy.
Asset quality remains under control; watchful of West Asia conflict
With stress in the MFI portfolio easing, the bank’s gross slippages reduced to 3.8% of loans from the highs of 7-8% a year ago, leading to a further reduction in the GNPA ratio to 2.6% (below 3% threshold for the Universal Bank License). The bank expects a sustained improvement in MFI stress formation, while it remains watchful of CV loans amid rising fuel prices due to the West Asia conflict. However, the management expects credit costs to moderate at 1.2-1.25% in FY27, driving up RoA.
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