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A distinctive SFB aspiring to build scale with profitability

Capital SFB (transitioned from Capital Local Area Bank) has established itself as a distinguished SFB, aided by its dominance in its home state of Punjab, with a largely secured loan portfolio (AUM of ~Rs79bn, with no direct retail MFI exposure), a healthy liability profile (34% CASA ratio), and relatively lower NPAs (GNPA at 2.7%) vs most SFB peers. The management attributes the bank’s better asset quality to its strong focus on underwriting and its emphasis on collateral-backed lending (90% of its portfolio is backed by immovable property) to mid-income borrowers. Though there have been slips on early growth guidance, the management has outlined a long-term vision of doubling its loan book by FY29, by focusing on its core loan products (MSME, Mortgages, Agri crop loans - ~80% of the loan book), along with a few new products (GL, PL, CV) while diversifying into adjacent states like UP. The management targets to lift its otherwise sub-optimal RoA from 1.3-1.4% to >1.6% over the next planning cycle, mainly driven by better margins, fees, and operating leverage. The mgmt is not keen to apply for a Universal banking license as of now, given its lower scale of operations and increasing regulatory easing, even for SFBs. The stock is trading at TTM 1x ABV now vs SFB peers at 1.1-1.7x and AU SFB at 3.9x. Currently, we do not have a rating on the stock.

Plans to double AUM by FY29 via product and geographic diversification

The bank’s core focus remains on three secured segments—MSME, mortgage, and agri lending—which collectively account for ~80% of its portfolio. MSME loans, ranging Rs1- 50mn and secured largely by property collateral with LTVs of 60–70%, are expected to continue as the key growth driver. Mortgage lending (HL/LAP) is offered primarily to salaried customers against prime property collateral (1.5–2x coverage), while agricultural loans are need-based and extended selectively to avoid the politically-sensitive small and marginal farmer segment. On the liability front, the bank has a reasonably healthy CASA ratio of 34%, leading to peer-best CoD of 5.9%. However, its relatively higher secured portfolio mix and no exposure to MFI/unsecured loans led to lower loan yields and thus, healthy albeit relatively lower margins at 4% vs peers’ >5%.

Secured lending, strong underwriting, and collateralization led to lowest GNPA ratio among SFBs

The bank’s asset quality remains relatively better vs peers, with GNPA at 2.7% due to contained fresh slippages of 1.5-2.5% (agri slippages too were low at ~2%) over last 2Y which, in turn, were due to a higher share of secured loans and focus on strong underwriting/collaterals. The bank maintains strong discipline in collateral – 90% of the loan portfolio is securitized with higher margin; also, the property undergoes dual verification by an internal team and external legal experts. Additionally, 90% of the asset customers are unique to the bank, while it holds immovable property as primary collateral. The bank has also avoided troubled districts in Punjab (eg Tarn Taran) to contain delinquencies. This discipline is reflected in its lower write-offs and LGDs. However, it will be interesting to see if it is able to maintain this discipline as it builds scale via expansion into newer geographies and product segments.

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