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PPoP in line; provisioning surge drives big earnings miss

Margin contracts 28bp QoQ

* Equitas SFB (EQUITASB) reported 2QFY25 PAT of ~INR129m (-93.5% YoY; 93% miss on MOFSLe) as the bank made additional provision of INR1.46b toward the MFI segment (INR1b toward SMA 1&2 advances and INR456m toward an additional NPA provision).

* NII grew 4.8% YoY to INR8.02b (3% miss). Margins moderated 28bp QoQ to 7.69%.

* Business growth was healthy with Advances growing 18% YoY/6.4% QoQ and Deposits at 29% YoY/6.2% QoQ. CASA mix moderated 67bp QoQ to 30.6%.

* Slippages were elevated, with fresh slippages increasing to INR5b/6.5% due to stress in the MFI business. GNPA/NNPA increased 22bp/14bp QoQ to 2.95%/0.97%. PCR moderated to 67.7%.

*  We cut our FY25E/FY26E EPS by 44%/18% and estimate FY26E RoA/RoE of 1.4%/12.8%. Reiterate BUY with a TP of INR80 (1.4x FY26E ABV).

Asset quality deteriorates sharply; business growth healthy

* EQUITASB reported a PAT of ~INR129m (-93.5% YoY; 93% miss on MOFSLe) as the bank made an additional provision of INR1.46b in MFI advances. In 1HFY25, earnings declined 90% YoY to INR386m (~INR3.2b for 2HFY25; implying a 22% decline).

* NII grew 4.8% YoY to INR8.02b (in-line). Margins moderated 28bp QoQ to 7.69%. Other income grew 31.7% YoY (up 14.5% QoQ) to INR 2.4b (8% beat). Treasury income stood at 460m vs 290m in 1QFY25.

* Opex grew 12% YoY at INR6.9b (in-line), leading to a stable C/I ratio of 66.4%. PPoP, thus, stood in-line at INR3.5b (up 6% YoY/2.7% QoQ).

* Advances grew 18% YoY (up 6.4% QoQ) to INR339.6b, led by healthy traction across segments, barring MFI, as management took a cautious step amid the rising stress in the segment.

* Disbursements stood at INR48.5b in 2QFY25 (down 2.2% YoY, up 20.4% YoY) with the vehicle business growing at 10.7% YoY. The share of MFI AUM decreased to 15.6% from 17.1% in 1QFY25. Management guided for continued stress in the MFI portfolio and aims to lower the segment share over the medium term.

* Deposits grew healthy at 29% YoY/6.2% QoQ to INR398.6b. CASA mix moderated 67bp QoQ to 30.6%. CD ratio remained stable at ~85% in 2QFY25.

* On the asset quality front, slippages were elevated at INR5b (up 97% YoY) due to stress in the MFI business. GNPA/NNPA increased 22bp/14bp QoQ to 2.95%/0.97%. PCR moderated to 67.7%.

* Credit cost for the MFI portfolio has moved up significantly to 10.18%. The overall credit cost for the bank (excluding the one-time floating provision), stands at 2.59%.

Highlights from the management commentary

* Provisioning of ~INR1.46b toward Microfinance was made during the quarter:

* The bank has further strengthened its IRAC provisioning in Microfinance, which has led to additional provisions of ~ INR456m.

* A one-time additional stress sector provisioning of ~INR1b was proactively created during the quarter for MFI. This translates to about 50% of 31-90 DPD of MFI portfolio as of 2QFY25.

* In MSE Finance, NPA increased due to one account of INR300m that slipped into 2Q; however, this is expected to be recovered in 3Q.

* Disbursement in MFI has slowed down in the coming quarter. In 3 to 4 years, the MFI mix will be in single digits and personal loan and credit card will fill the balance.

Valuation and view: Reiterate BUY with a TP of INR80

* EQUITASB reported a weak quarter, characterized by a sharp rise in the slippage run-rate and a further 28bp QoQ contraction in margins. Deposit growth remained healthy, led by strong growth in retail term deposits, although the CASA mix moderated further. Asset quality deteriorated further due to higher slippages and lower recoveries. The bank is witnessing higher stress due to the overleveraging of MFI customers. It aims to reduce the MFI mix and replace it with personal loans and credit cards in 3-4 years, targeting to achieve an overall unsecured loan mix of ~20%. We cut our FY25E/FY26E EPS by 44%/18% and estimate FY26E RoA/RoE of 1.4%/12.8%. Reiterate BUY with a TP of INR80 (1.4x FY26E ABV).

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