Equitas Small Finance Bank Pivoting Towards A More Secure Business Model, Says Motilal Oswal; Maintains 'Buy'

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Motilal Oswal Report

After a strong FY23 and a reported RoA of ~2% in FY24, Equitas Small Finance Bank Ltd. has faced significant challenges related to asset quality and earnings, leading to a notable dip in profitability in recent years.

We believe that FY26 will be another reset year for Equitas SFB, driven by the frontloading of provisions, reduction in the MFI portfolio to decrease business cyclicality, and benefits from liability repricing expected from 2H onwards.

By diversifying into secured lending, investing in technology, and maintaining a controlled MFI mix, Equitas SFB is creating a stronger, more resilient bank. The Universal Banking License remains a significant opportunity, enabling the bank to reduce funding cost gaps, boost depositor trust, and help re-rate the franchise among investors.

With loan growth guided at 15-16%, credit costs normalizing at 1.25%, and cost of funds expected to drop 80- 90bp, we estimate RoA to recover to 1%/1.4% over FY27-28, respectively.

We reiterate our Buy rating with a target price of Rs 70 (premised on 1.3x FY27E BV).

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