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Growth Momentum Intact; Leadership Transition Clouds Near-Term Outlook

Est. Vs. Actual for Q2FY27: NII – MISS; PPOP – MISS; PAT – BEAT Changes in Estimates post Q2FY27

FY27E/FY28E/FY29E (in %): NII: 1.7/1.2/0.7; PPOP: 2.4/0.4/-2.2; PAT: 11.5/3.1/-1.1

Recommendation Rationale

* MD & CEO Resigns; Leadership Transition Raises Near-Term Uncertainty: EQSFB’s MD & CEO P N Vasudevan’s decision to step down as MD & CEO introduces a near-term leadership transition overhang at a time when EQSFB is demonstrating improving business momentum, stronger asset quality and better profitability. Management clarified that the resignation was driven by persistent investor concerns around the perception of a conflict of interest arising from his family’s investments in an NBFC, rather than any regulatory or legal impediment. He clarified that there was no regulatory nudge to his decision to step down. The board has initiated the process to identify a suitable successor, with both internal and external candidates under consideration. The board expects the transition process to be completed in 3-4 months, with the candidate-selection process itself expected to take <1 month. Mr Vasudevan will continue to discharge his responsibilities until his successor takes over, providing continuity during the interim period. With Mr Vasudevan’s association with the bank since its inception, his departure creates a near-term overhang regarding leadership transition.

* Excess Liquidity Drives Near-Term Compression; H2 Recovery Expected: In Q2, EQSFB’s margins declined sharply by 33bps QoQ, reflecting the combined impact of excess liquidity and higher CoF even as yields remained stable. The bank had proactively strengthened its funding profile through deposit mobilisation, refinance borrowings, securitisation and direct assignment transactions, alongside a Tier II capital raise resulting in temporarily higher liquidity. Going into H2, management expects margins to recover 18-20bps by Q4 vs Q2 levels as the excess liquidity gets deployed. Over the medium term, the bank is working towards a sustainable NIM of ~7% over the next two years. However, management expects a further 8-10 bps increase over the next 2-3 quarters as existing deposits mature and reprice. While the bank has already raised SA and TD rates ahead of the recent repo rate increase, EQSFB does not plan another immediate rate revision at present and will assess the transmission of rates based on future rate hikes. While we expect some near-term recovery in margins as surplus liquidity gets deployed, a largely fixed book limits meaningful yield improvement going ahead. We expect NIMs to settle at 6.8-6.9% over FY27-29E.

Sector Outlook: Positive

Company Outlook: EQSFB’s diversified lending franchise and strong demand across segments provide visibility on sustained growth. The improvement in asset quality, supported by healthy MFI CE and limited exposure to drought-affected regions, should support healthy asset quality metrics, thereby keeping credit costs contained. Near-term margin pressures should ease as surplus liquidity gets deployed and improve by 18-20bps by exit-FY27. Management’s focus on branch productivity and cross-selling should support operating leverage, thereby driving the C-A Ratio lower over the medium term, eventually aiding RoA improvement to 1.5% by FY29E. The MD CEO’s resignation and the consequent leadership transition remain a near-term overhang on the stock. This could also potentially delay the application for the Universal Banking License. Appointment of a credible successor will be important to sustain strategic continuity and investor confidence

Current Valuation: 1.0x Sep’28E ABV Earlier Valuation: 1.4x FY28E ABV

Current TP: Rs 74/share Earlier TP: Rs 93/share

Recommendation: We maintain our BUY recommendation

Alternative BUY Ideas from our Sector Coverage:

AUSFB (TP – Rs 1,180); Ujjivan SFB (TP – Rs 86)

Financial Performance:

* Operational Performance: EQSFB’s disbursements growth improved to 39/10% YoY/QoQ, primarily led by non-MFI disbursements (+31/13% YoY/QoQ). Advances growth improved to 30/6% YoY/QoQ, led by healthy growth in the MFI segment (+87/5% YoY/QoQ) and continued growth in non-MFI segments (+24/7% YoY/QoQ). Deposits growth was robust, up 19/7% YoY/QoQ, led by TDs, which rose 28/6% YoY/QoQ. CASA deposits grew by -1/10% YoY/QoQ. CASA ratio improved from 25.7% vs 30.9/25.1%% YoY/QoQ.

* Financial Performance: NII growth was healthy at 31% YoY, flat QoQ. However, NIM contracted by 33bps QoQ to 6.74%. Non-interest income grew by 27/14% YoY/QoQ, primarily driven by strong fee income (+17/16% QoQ). Opex growth was at 20/4% YoY/QoQ, with C-I ratio at69.5% vs 68.6% QoQ. PPOP grew by 67/-1% YoY/QoQ. Credit costs improved meaningfully to 94bps vs 137bps QoQ. PAT grew by 801/19% YoY/QoQ.

* Asset Quality improved with GNPA/NNPA at 2.29/0.70% vs 2.42/0.71% QoQ. Slippages were higher QoQ, with the slippage ratio at 3.8% vs 3.4% QoQ, mainly due to higher non-MFI slippages

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