Equitas Small Finance Bank - Robust Growth To Drive Continued Re-Rating: Motilal Oswal

Motilal Oswal Report

Equitas Small Finance Bank Ltd. reported strong profitability in FY23, with return on asset expanding to 1.9% (average of 2.2% in H2 FY23). It was driven by steady margins, healthy loan growth and controlled credit costs.

The bank focuses on building a diversified loan book, with small business loans, vehicle finance, microfinance and housing finance being the key business segments. Loan growth was strong at 33% in FY23, and we estimate a robust 27% compound annual growth rate in loans over FY23-25.

Equitas Small Finance Bank has made good progress in building a granular liability franchise, with a rising mix of retail deposits. The current account and savings account mix is healthy at 42.3%. We expect deposit traction to remain strong even as the CASA mix declines further.

It has demonstrated a strong improvement in asset quality, with X bucket collection efficiency improving to pre-Covid levels and gross non-performing asset/net non-performing asset ratios moderating to 2.8%/1.2% as of Q4 FY23.

We expect asset quality ratios to improve further and expect provision coverage ratio to improve to 70% by FY25 (over 1,400 basis point PCR improvement in FY23).

We estimate Equitas Small Finance Bank to deliver FY25E return on asset/return on equity of 2.1%/16.7% and value it at Rs 105 (1.7 times March-25E book value).

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