IGI Logo

Asset quality ratios deteriorate

-      Equitas Small Finance Bank (EQUITASB) reported in-line earnings for 3QFY24 at INR2b (up 18.7% YoY). PPoP grew 29% YoY (up 9% QoQ, in line), led by high other income.

-      AUM growth was steady at 32% YoY/5% QoQ to INR328b, driven by healthy traction in most of the segments (barring NBFC). The management expects credit growth to remain robust at 25-28% in FY24.

-      Deposit growth was robust at 38% YoY/5% QoQ, led by faster growth in TDs. The CASA mix moderated 85bp QoQ to 32.7%. The cost of funds, thus, rose 15bp QoQ to 7.4%, leading to a 6bp drop in NIMs to 8.37%.

-      Slippages were elevated mainly due to higher slippages from vehicle finance and micro finance. GNPA/NNPA ratios increased 26bp/16bp QoQ to 2.53%/1.13%. PCR declined slightly to 56%. 

-      We maintain our FY24E/FY25E EPS and estimate FY25 RoA/RoE of 1.9%/15.3%. Maintain BUY with a TP of INR125 (2.0x Sep’25E ABV).

Business growth steady; NIMs compress 6bp QoQ

-      EQUITASB reported PAT of INR2b (up 18.7% YoY). NII grew 21% YoY to INR7.85b (in line). Provisions increased 69% YoY/34% QoQ to INR0.84b (9% higher than our estimate).

-      Other income grew 35% YoY/13% QoQ as fee income grew 24% YoY and Treasury income stood at INR300m (vs. INR180m in 2QFY24).

-      Opex grew 21% YoY/2.2% QoQ to INR6.3b, leading to a decline in the C/I ratio to 63.6%. PPoP, thus, grew 29% YoY/9.1% QoQ to INR3.6b.

-      Total AUM jumped 32% YoY (5% QoQ) to INR328b, led by healthy traction across segments (barring NBFC). Disbursements stood at INR47.4b in 3QFY24, down 4.5% QoQ. Small business loans/vehicle finance grew 6%/4% QoQ, and micro finance growth stood at ~32% YoY (+3% QoQ). Housing finance grew at a robust 8.4% QoQ. The share of MFI AUM stood at 18.5% (vs. 18.8% in 2QFY24).

-      Deposits jumped 38% YoY to ~INR324b, led by 6% QoQ growth in term deposits. The CASA ratio, thus, moderated 85bp QoQ to 32.7%, down from its peak of 52% in 4QFY22. The management has guided for a CD ratio of ~85% by FY25 vs. 90% in 3QFY24.

-      On the asset quality front, slippages were elevated at INR3.1b (4.8% annualized) due to heavy floods in Tamil Nadu and high slippages in vehicle finance and micro finance. GNPA/NNPA ratios increased 26bp/16bp QoQ to 2.53%/1.13%. PCR declined slightly to 56%.

Highlights from the management commentary

-      The management guides for a healthy credit growth of 25-28% for FY24.

-      EQUITASB has given a CD ratio guidance of ~85% by FY25.

-      Disbursement yields have improved, with yields at 18.8% in 3QFY24. SBL –17.16%, MFI-25%, Used CV at 19.56%, New CV at 13.69%.

-      During 3QFY24, the bank securitized/assigned advances worth INR13.9b.

-      The profit on the sale of investments for the quarter was INR269m. Income from the sale to ARC stood at INR700m.

Valuation and view

EQUITASB reported a mixed performance with strong AUM growth driven by healthy traction across segments however slippages increased while NIMs declined slightly. Deposit growth remained robust, fueled by healthy growth in retail term deposits, although the CASA mix deteriorated sharply over the past year. While margins are likely to moderate further in 4QFY24, the rise in disbursement yields and the nearing end of deposit re-pricing would help the bank limit the impact. Asset quality deteriorated further amid higher slippages and lower recoveries. The bank has guided for a moderation in slippage run rate as collection efficiency improves. It expects credit cost at ~1.25% in FY24. We maintain our FY24E/FY25E EPS and estimates FY25 RoA/RoE of 1.9%/15.3%. Maintain BUY with a TP of INR125 (premised on 2.0x Sep’25E ABV).

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412