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A good quarter

Equitas SFB delivered a sturdy quarter which was characterized by 1) RoA/RoE of 2%/15% adjusted for one-offs/lumpy items (both adverse and beneficial), 2) purposeful LDR correction (from 91.5% to 87%), 2) prudential loan growth (pivoted on better RoA products and avoiding aggression in current rate environment), 3) reasonably strong overall/granular deposits mobilization along with moderated increase in CoF, 4) 20 bps NIM decline which had additional impact of increased balance sheet liquidity, 5) improved traction in processing fees and TPP income and 6) stable asset quality reflected in steady X-bucket CE, SMA pool, core slippages and recurring credit cost. During the quarter, there were additional (one-time) slippages (Rs385mn) and credit cost (Rs150mn) due to NPA classification of loans involving co-borrowers. The quarter also had a net one-off impact of Rs170mn from accounting policy change with respect to ESOPs.

Guidance of 25% growth and stable NIM & RoA for FY25

Focused deposits mobilization through segmented approach, cross-sell and digital/tech platforms, and limited incremental LDR adjustment (envisaged at 85% by Mar’25) underpin management’s expectation of delivering around 25% loan growth and a largely stable NIM and RoA in FY25. Management believes that deposit rates have peaked and estimates CoF increase of 10-12 bps over next two quarters. Through the aforesaid deposit strategy, the bank targets to reduce the CoF differential with the large banks to 100-125 bps in the next three years from ~250 bps currently. The bank has also planned an opex outlay of Rs5.2bn over next three years for developing products like PL, Credit Cards, Selfe (Digital) SA & Loans and Forex Services.

Nuanced growth moderation, decreasing CoF increase and steady asset quality

Gross advances growth moderated to 5% qoq/23% yoy with bank calibrating new CV financing and significantly slowing NBFC lending. New products like Merchant OD and Used Car financing continue to scale-up well. Traction also remained strong in SBL and Affordable Housing. In the context of the incremental lending mix/focus, the disbursement yield has further improved in recent quarters. The CoF increased only by 8 bps qoq in Q4 FY24 versus much larger increases seen (15-30 bps) in the preceding 4-5 quarters. The X-bucket CE remains firm across main loan products at 99%+ and 30- 90 dpd pool for the bank continues to be moderate at near 3%. Gross NPA addition was stable qoq, and Net NPA addition was much lower due to stronger upgradations and recoveries.

Retain estimates and constructive view

Our earnings and RoE estimates for FY25/26 largely remain unchanged. We estimate earnings/AUM CAGR of 22-25% with RoE reaching near 17% in FY26. Valuation is reasonably attractive at 9x PE and 1.4x P/ABV on FY26 in context of a) resilient RoA delivery in ongoing tough environment, b) bank being a significant beneficiary in a rate cut cycle and c) diversified asset portfolio and better-among-SFBs deposit franchise.

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