Equitas Small Finance Bank is a small finance bank (SFB) headquartered in Chennai, Tamil Nadu. It was founded in 2016 as a microfinance lender. The Bank is a subsidiary of holding company Equitas Holdings Ltd. Recently, the bank and Equitas Holdings Ltd announced their merger. The merger gets the RBI's no-objection nod as well. The Bank's current market price on 06 May 2022, closed at Rs 54.30 after gaining 0.74%.
Higher CASA helped protect margins
As per the Emkay Research, "Equitas posted AUM growth of 15% YoY and the highest-ever quarterly disbursements of Rs33bn, mainly led by strong demand for vehicle finance, SBL and affordable housing. CASA remained high & healthy at 52% due to strong CASA traction and a decline in TD, which helped protect NIM at 9.1% despite a drop in loan yields as the bulk of credit growth happened at the fag end of the quarter. That said, the bank's long-standing stance to reduce the share of its high-yielding MFI portfolio, along with rising price competition in VF and its preference for a secured portfolio (including housing), should create pressure on NIM. The bank believes that it should be able to contain margin pressure as it has a strong CASA profile, which should keep cost in check."
According to the brokerage, "Gross slippages were high at Rs4.1bn (9.7% of loans vs. 6.4% in Q3). However, higher recoveries/woffs led to a 37bps QoQ contraction in the GNPA ratio to 4.2%. Specific PCR remained uncomfortably low at 43%, and the bank now intends to increase it to 60% gradually. The restructured pool remains elevated at Rs15bn/7% of loans, of which 40% is standard, 13% in 1-30 DPD, 18% in 30-60 DPD, 9-10% in 60-90 DPD and 19% in >90 DPD bucket. 48% of the restructured book is in the CV segment and 28% in SBL. As per management, the 31-90 DPD pool (SMA) for SBL/CV/MFI stood at 5.2%/7.8%/6%, while overall 31-90 DPD declined to 5.1% in Mar'22 vs. 6.6% in Dec'21 vs. 6.5% of loans in Sep'21."
Buy for a target price of Rs 75 per share
Equitas did well on the liability front while gradually diversifying its asset base away from MFI. However, it needs to focus on portfolio quality and build counter-cyclical buffers. The brokerage has said, "We expect the bank's RoA/RoE to improve to 1.7%-2%/11-16% over FY23-25E from a low of 1.1%/7% in FY21, mainly led by better growth, operating leverage and lower LLP. Retain Buy with a TP of Rs75 based on 1.8x FY24E ABV (vs. Rs80 based on 2x Dec'23E ABV) due to higher CoE and effectively lowering the TP of holdco to Rs164 from Rs175." According to the brokerage, higher-than-expected NPA formation, loss of momentum in CASA flow and management attrition are some key risks.
The stock has been picked from the brokerage report of Emkay Research. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decisions.