A brief overview on Equitas Small Finance Bank gained public traction

Equitas Small Finance banks ranks the best amongst its peers in the Small Finance Business space with a diversified asset mix and a largely secured portfolio. It is the first bank to waive off NMC charges in January’21 and offered no minimum deposit limits.

With an experience of 8-10 years, the bank is victorious majorly because of the segments it operates in. These segments attract very little competition from its tradition peers and are scalable as they can provide tedious services such as credit assessment and underwriting process to the bottom-of-the-pyramid segment. The key identified segments of the bank are Small Business Loans, Home Loans and Vehicle Finance which are growing in a calibrated manner. While other Small Finance banks serve in MFI Lending, Equitas Small Finance Banks has an under-writing process set up which gives it an advantage over others. The underwriting process was built from the years of assessment of developed metrics of self-employed customers. The bank as successfully gained the secured loan book share to 81% in 2021 from 24% in 2013. The expectation is for the bank to grow to ~85% as MFI business share would steady at ~15% over the next 3 years.

The bank has been successful targeting and gaining semi-urban and urban audiences to source deposits, of more than 0.1mn, by offering a higher interest rate (7%). This strategy has outperformed its parameters as the CASA deposits increased to Rs. 82bn which portrayed a 153% YoY growth and 45% QoQ growth. The share of CASA deposits on YoY basis has increased as it stood at 25% in Q2FY21 and now stands at 45% in Q2FY22. To attract more potential clients, the bank has tied up with Aditya Birla Capital to offer broking and DEMAT account services.

The improvement of Equitas’ Collection Efficiency (CE) was estimated at 105% in July’21 with covid restrictions easing after dropping to 78% in May’21. The bank saw a good response in its CE from Dec’20, after the first wave when all the customers opted for moratorium as most of them belong to the earn and pay segment. The restructured book increased by 7.4% (RS. 13.3bn) till July’21 vs 2.4% (Rs4.3bn) increase in 4QFY21. In Q2FY22, another Rs. 5-8bn have been awarded for restructuring. Along with these, the reduction in unsecured loan business reduced which also aided in improving the asset mi quality. The banks hold a decent PCR of 51.2%. The expected losses are estimated at 2.1% for FY22E and 2% FY23E and FY24E each.

The operating profit CAGR of 25% is estimated on the terms of NIMs dropping to 8.2% (by 40bps), translating NII to 19% CAGR and operating leverage between FY21-24E. Interest yields are protected as 90-95% of advances carry fixed rate of interest while this may be revised as the bank moves up the value chain in the customer selection process and share of the micro finance bank tethers lower. With worst of the economy failures in the past, the improving CE, and the secured nature of loans should contain credit costs at ~2%, resulting in strong earnings growth.

The bank has a CAR of 24.1% with Tier 1 capital of 22.6% for it to sustain growth over the next 3 years. The estimated AUM stands at 22%, NII at 19% and PAT CAGR at 32% over FY 21-24E. The ROE and ROA are estimated 17.8% and at 2.3% respectively for FY24E. All these parameters with the strong momentum witnessed in n CASA mop-up while disbursements reached all-time high in 2QFY22, the future outlook for the banks looks strongly positive.

However, beyond the rosy picture hangs the risks associated with the bank. RBI has permitted Equitas Bank to apply for amalgamation with its Holdco - Equitas Holdings Ltd. RBI also published a guideline paper stating no more requires promoters to reduce their stake to 40% within 5 years. The interim dilution targets of ~5-15 years are proposed to be removed. However, the same has not yet been implemented. The onset of third wave which may affect the borrowing cash flows.