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Earnings in line despite one-offs; business growth steady

Asset quality ratios deteriorate slightly

* Equitas SFB (EQUITASB) reported in-line earnings for 4QFY24 at INR2.08b (up 9.3% YoY). However, adjusted for one-off items, the bank reported a PAT of INR2.33b.

* AUM growth was steady at 21% YoY/3% QoQ to INR337b, driven by healthy traction in most segments (barring NBFC and new CV). The management expects credit growth to remain robust at 25% YoY in FY25.

* Deposit growth was strong at 42% YoY/12% QoQ, led by healthy growth in TDs and CASA. The CASA mix moderated 74bp QoQ to 32%. Cost of funds (COF) rose 8bp QoQ to 7.44%, while NIMs dropped 20bp QoQ to 8.17%.

* Slippages were elevated on one-time classification of the co-borrower NPA. GNPA/NNPA ratios, thus, increased 8bp/4bp QoQ to 2.61%/1.17%. PCR was stable at 56%.

* We maintain our FY24E/FY25E EPS and estimate FY26 RoA/RoE of 2.0%/17.4%. Maintain BUY with a TP of INR125 (1.9x FY26E ABV).

PPoP in line; NIMs compress 20bp QoQ

* EQUITASB reported PAT of INR2.08b (up 9.3% YoY), dragged down by the co-borrower provision and change in ESOP accounting policy. Adjusted for one-off items, PAT stood at INR2.33b.

* NII grew 11% YoY to INR7.85b (in line). Other income rose 1% YoY/17% QoQ as fee income increased 14% QoQ and Treasury income declined to INR270m (vs. INR300m in 3QFY24).

* Opex grew 17% YoY/3.4% QoQ to INR6.5b, leading to an elevated C/I ratio of 63.5%. PPoP, thus, declined 3% YoY (up 4% QoQ) to INR3.7b.

* Total AUM jumped 21% YoY (3% QoQ) to INR337b, led by healthy traction across segments (barring NBFC and new CV). Disbursements stood at INR50.9b in 4QFY24, up 7.5% QoQ. Small business loans/vehicle finance grew 12%/1% QoQ, and microfinance declined by 12.5% YoY (up 6% QoQ). Housing finance grew by 7.1% QoQ. The share of MFI AUM stood at 18.6% (vs. 18.5% in 3QFY24).

* Deposits jumped 42% YoY to ~INR361b, led by 13% QoQ growth in term deposits. CASA mix moderated 74bp QoQ to 32%, down from its peak of 52% in 4QFY22. The management has guided for a CD ratio of ~85% by FY25 vs. 86% in FY24.

* On the asset quality front, slippages were elevated at INR3.6b (4.7% annualized) as the bank took a one-time impact of co-borrower NPA (wherein if the primary loan A/C becomes NPA, the co-borrower is also classified as NPA), resulting in higher credit cost in 4QFY24. GNPA/NNPA ratios increased 8bp/4bp QoQ to 2.61%/1.17%, while PCR was flat at 56%. Provisions jumped 26% QoQ to INR1.1b (18% higher than our estimate).

Highlights from the management commentary

* Going forward, the bank aims for an 80% secured and 20% unsecured composition in its loan portfolio.

* The bank expects to sustain RoA at 2% in future, supported by growth in highyielding assets.

* Interest rates have peaked, and the CoF could potentially increase by 10-12bp in 1HFY25.

* Previous pressure on NIMs stemmed from the bank's focus on reducing the CD ratio. NIMs are anticipated to remain stable in FY25 compared to current levels.

Valuation and view: Maintain Buy with a TP of INR125

EQUITASB reported an in-line performance in 4QFY24, with strong AUM growth driven by healthy traction across segments. However, slippages increased but 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 witness a bit pressure due to rising CoF, 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 the slippage run rate as collection efficiency improves. It expects credit cost at ~1.25% in FY25. We raise our estimates by 4%/3% in FY25/FY26, translating into RoA/RoE of 2%/17.4% in FY26E. Maintain BUY with a TP of INR125 (premised on 1.9x FY26E ABV).

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