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Manages to maintain 2% RoA

Equitas SFB’s PPOP beat of 6% on our estimate, despite 2% NII miss, was led by higher treasury income and lower opex. The bank managed to maintain RoA/RoE at 2%/14.5% despite the marginal increase in credit cost on further normalization of NPL additions/reductions. While the portfolio spread was stable at 10.2%, NIM declined by 6 bps on increased BS liquidity on moderation of CD ratio (fell from 93% to 90%). Gross advances grew 5% qoq/32% yoy even though disbursements were 5% lower sequentially, as the annualized portfolio run-off rate declined to 41% from 45% in preceding quarter. Bank’s loan growth continues to be driven by Small Business & Agri (6.4% qoq), Affordable Housing (8.4% qoq) and Used Car (11.5% qoq) financing segments. Deposits growth was healthy at 5% qoq, led by strong traction in Retail TDs while CASA deposits grew sequentially (breaking the declining trend of past 3Qs).

CD ratio to moderate; NIM will stabilize soon

Management guides for 25-28% gross loan book growth in FY24 and 25%+ growth in FY25 and achieving a CD ratio of 85% by Mar’25. Loan growth is expected to be led by Small Business & Agri loans (non-TN portfolio), Vehicle Finance (Used Cars & New LCV/SCV/Pick-up financing) and Affordable Housing loans. The roll-out of new LOS (loan origination systems) for these products is expected to enhance productivity/competitiveness and thus augment growth. With the pace of increase in funding cost declining and the pace of increase in portfolio yield improving, Equitas SFB’s NIM could stabilize soon and then can start inching-up notwithstanding the targeted gradual reduction in CD ratio. Banks’ blended disbursement yield is trending 120 bps higher than portfolio yield. Thus, NIM would benefit when deposit cost peaks out.

Limited room for improvement in CI ratio; credit cost is normalizing

Cost/Income ratio is expected to remain under check with moderation in Branch expansion investments and improving profitability of currently sub-scale loan product segments. However, investments on Tech, digital products and Branding will continue. Besides normalizing asset quality trends, higher slippages in the quarter were caused by floods in Tamil Nadu in the month of December which increased delinquencies in VF and MFI portfolios. Collections are expected to be better in Q4 FY24 as many of these delinquencies would be collected. Management expects credit cycle to normalize with expectations of slippage rate of 3-4% and credit cost of 1.25%.

Improving RoA beyond 2% looks tough; Maintain BUY

Our earnings estimates for FY25/26 have undergone materials cuts due to calibration of loan growth and considering the moderation of CD ratio. The challenges around improving RoA beyond 2% could last for the bank, despite a likely significant loan spread expansion (assuming peaking of deposits cost), on account of moderation in CD ratio, limited room for CI ratio improvement and full normalization of credit cost. A renewed intent to augment PCR towards 70% can push credit cost higher. We estimate 25% loan CAGR, 30% earnings CAGR and stable RoA of 2% over FY23-26. RoE is expected to improve to 17.5-18% by FY26 on rise in leverage. Even on lowered estimates, the valuation is not expensive at 9x P/E and 1.5x P/ABV on FY26 estimates. Maintain BUY and increase 12m PT to Rs125 on rolling over target multiple to FY26.

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