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Equitas continued to post dismal results, as it slipped into loss of Rs2.2bn, mainly due to persistent higher MFI/non-MFI stress and accelerated standard provisions on MFI loans (Rs1.9bn, mainly to ease provisioning in 9MFY26). Overall gross slippages were higher at Rs6.6bn/8.3% of loans, mainly due to the impact of adverse ordinances in the states of Karnataka and Tamil Nadu impacting collections in MFI and even spilling over into the SBL portfolio (below Rs0.7mn). However, the bank resorted to higher write-offs to keep GNPA ratio below 3% (at 2.9%), to qualify for a Universal Bank license. The management guides for mid-teen credit growth in FY26, and expects MFI stress to ease by 4Q. This, coupled with utilization of standard provisions, should help the bank remain profitable for the full FY26E. Factoring in the sharp cut in earnings and continued stress, we retain REDUCE with an 8% cut in TP to Rs55, valuing the bank at 1x Jun-27E ABV. The bank plans to raise Tier I (equity capital) of Rs12.5bn to shore up its capital buffer (Tier I at 17.2%).

Growth and margin slip further

Overall AUM growth slipped further to 8% YoY, as the bank continues to run-down its MFI book (now ~9% of the loan book), new CVs, and slower traction in M-Lap amid rising asset quality stress. That said, the bank expects some growth pick-up hereon, and guides for mid-teen credit growth. NIM contracted further by 60bps QoQ, due to cumulative effect of the rate-cut cycle and higher interest reversal on NPAs. The bank has cut deposit rates, though we believe that higher interest reversals should keep margins in check during FY26E. This, coupled with the bank’s strategy to further run-down the MFI portfolio share—which shall inch-up secured loan portfolio—should keep margins under pressure.

Higher stress/provisions push bank into loss

Gross slippages were higher at Rs6.6bn/8.3% of loans mainly due to adverse ordinances in the states of Karnataka and Tamil Nadu impacting collections in MFI and even spilling over into the SBL portfolio (below Rs0.7mn). However, the bank resorted to higher writeoffs to keep GNPA ratio below 3% at 2.9%. This, coupled with change in provision norms and additional standard asset provision for MFI loans (Rs1.9bn) in Q1FY26, pushed the bank into loss. The bank expects MFI stress to normalize by 4QFY26, while it would utilize standard asset provision created in Q1FY26 over the next 9M to contain provisions and thus help it turn profitable.

We retain REDUCE; cut TP

Factoring in the sharp cut in earnings and continued stress, we retain REDUCE with an 8% cut in TP to Rs55, valuing the bank at 1x Jun-27E ABV. The bank has plans to raise Tier I equity capital of Rs12.5bn to shore up its capital buffer (Tier I at 17.2%). Key upside potential to our rating: Better than expected growth/margin trajectory; earlier than expected improvement in NPA formation.

Key Concall takeaways

Outlook on loans, deposits, and NIM

• The bank expects 15-16% credit growth in FY26, with >20% growth in the secured book. Secured book remains strong (now 91% of the overall book) and well-diversified, with healthy growth and CE.
• Focus remains on used CVs and used cars, with a strategic scale-down in new CV exposure.
• During the quarter, the bank launched FCNR deposits for ETB customers, garnering over USD3mn in inflows, demonstrating strong initial traction and customer confidence.
• CD ratio was 79.85% in Q1FY26 compared to 85.65% in Q4FY25. This is expected to moderate as growth picks up in subsequent quarters.
• Loan yields moderated in Q1, impacted by higher delinquencies and a reduction in the MFI portfolio.
• Lower LDR, coupled with the recent policy rate cuts and higher interest reversal on NPAs, led to a 58bps QoQ fall in NIMs to 6.55%.
• The bank expects margins to hover at current levels in FY26, supported by moderating CoF partly offset by reduction in loan yields (as the bank prunes its MFI book) and tepid credit growth outlook.

Asset quality

• CE is likely to normalize only by Q3/Q4, prompting upfront provisioning; credit costs are expected to taper by Q4FY26.
• FY26 credit cost for the non-MFI portfolio is estimated at 1-1.2%. Rs4bn provisions have been made on the MFI book in Q1; the management conservatively expects an additional Rs3bn in 9MFY26.
• Karnataka (KA) and Tamil Nadu (TN) ordinances impacted lower-ticket LAP loans at the segment in Nov-24. Signs of recovery were visible in Jul-25, with DPD and net slippages declining.
• In group lending, borrower willingness to cover for a co-borrower’s default has weakened, affecting CE.
• Limited stress expected in VF; in SBL, most slippages occurred in KA in the Rs1mn segment, primarily in MLAP and GLAP products

Others

• AU SFB’s universal bank license is expected to set a precedent for the future roadmap of other SFBs.
• The bank raised the second tranche of tier 2 capital of Rs5bn in Jul-25. This additional Tier 2 capital will improve CAR by ~1.7%, to ~22%. The expected growth for the next few quarters would be fueled by this additional capital.
• The bank has also received approval from shareholders for raising Tier 1 equity of Rs12.5bn. This Tier 1 Equity is planned around Q1FY27, to support growth in subsequent years.
• The bank has plans to add 50 branches in 9MFY26 and onboard the right talent for driving growth in the secured loan book.
• The bank bought Priority Sector Lending Certificates (PSLCs) worth ~Rs64mn during Q1FY26. This cost is amortized on a straight-line basis over the certificate’s tenor. Accordingly, ~Rs16mn has been recognized as PSLC fee expense on a pro-rata basis in Q1FY26.
• The bank has started the AD-1 business in Q1FY26.

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