Buy Equitas Small Finance Bank Ltd For Target Rs.80 by Motilal Oswal Financial Services Ltd
NII in line; business growth remains modest
Margin contracts 30bp QoQ
* Equitas SFB (EQUITASB) reported 3QFY25 PAT of ~INR663m (-67% YoY; 17% miss to MOFSLe) amid lower other income, partially offset by slightly lower provisions.
* NII grew 4% YoY to INR8.18b (in line). Margins contracted ~30 bp QoQ to 7.39% in 3QFY25 (18bp contributed by a drop in the MFI portfolio).
* Business growth was healthy with advances growing 21% YoY/4.2% QoQ, while deposit growth stood modest at 25.8% YoY/2.2% QoQ. CASA mix moderated 193bp QoQ to 28.6%.
* Slippages were elevated, with fresh slippages increasing to INR5.9b vs INR5.1b. GNPA increased 2bp to 2.97%, while NNPA declined 1bp QoQ to 0.96%. PCR stood at 68.3%.
* We estimate FY26E RoA/RoE of 1.2%/11.4%. Reiterate BUY with a TP of INR80 (1.3x Sep’26E ABV).
Asset quality deteriorates slightly; loan growth healthy.
* EQUITASB reported PAT of ~INR663m (-67% YoY; 17% miss on MOFSLe) amid lower other income, partially offset by slightly lower provisions. In 9MFY25, earnings declined 82% YoY to INR1049m (~INR1.9b for 4QFY25; implying a 7.4% YoY decline).
* NII grew 4% YoY to INR8.18b (in line). Margins contracted ~30bp QoQ to 7.39% in 3QFY25. Other income grew 16% YoY/ flat QoQ to INR 2.4b (3% miss on MOFSLe). Treasury income stood at INR400m vs INR460m in 2QFY25.
* Opex grew 15% YoY/ 5% QoQ at INR7.2b (in line). C/I ratio increased to 68.5%. PPoP, thus, grew to INR3.3b (down 8% YoY and 5% QoQ).
* Advances grew 21.1% YoY (up 4.2% QoQ) to INR353.9b, led by healthy traction across segments, barring MFI, as management took a cautious step amid the rising stress in the segment.
* Disbursements stood at INR51.4b in 3QFY25 (8.5% YoY, 6% QoQ), with the MFI disbursement at INR11b. The share of MFI AUM decreased to 13.8% from 15.6% in 2QFY25. Management guided for continued stress in the MFI portfolio and aims to lower the segment share over the medium term.
* Deposits grew at 25.8% YoY/2.2% QoQ to INR407b. CASA mix moderated 193bp QoQ to 28.6%. CD ratio increased to ~87% in 3QFY25.
* On the asset quality front, slippages were elevated, with fresh slippages increasing to INR5.9b vs INR5.1b. GNPA increased 2bp to 2.97%, while NNPA declined 1bp QoQ to 0.96%. PCR stood at 68.3%. Credit cost stood at 2.65% in 3QFY25.
Highlights from the management commentary
* The bank is working on building a team to penetrate the top 15% of MFI loans and scale this to the M-LAP product.
* SMA 0 and 1 have improved, while SMA 2 has risen to 2.73%. Eventually, a part of this will move to NPA. SMA 0 and 1 have stabilized and the ex-bucket has improved.
* 80% of the book is fixed rate and the remaining is floating (which is Affordable). The floating rate is linked to the Repo rate, and the bank is awaiting a reversal in the interest rate cycle, which would benefit the bank.
Valuation and view: Reiterate BUY with a TP of INR80
* EQUITASB reported a modest quarter, characterized by a rise in the slippage run rate and a further 30bp QoQ contraction in margins. Deposit growth also remained modest with CASA ratio moderating further. Loan growth stood relatively better despite the bank’s attempt to further bring down the share of the MFI mix. The bank is witnessing higher stress due to the overleveraging of MFI customers. The MFI book is declining at a much faster rate and the bank will require 2-3 quarters to experience a normalized quarter of earnings. We estimate FY26E RoA/RoE of 1.2%/11.4%. Reiterate BUY with a TP of INR80 (1.3x Sep’26E ABV).
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