Equitas Small Finance Bank (Equitas SFB) achieved strong profitability in FY23, with a notable return on assets of 1.9%. This success was primarily due to consistent margins, robust loan growth, and effective management of credit costs. The bank’s strategic focus lies in establishing a diverse loan portfolio, specifically emphasising small business loans (SBL), vehicle finance, microfinance (MFI), and housing finance. The bank anticipates a robust CAGR of 27% in loans for the period of FY23-25.
Equitas SFB has made good progress in building a granular liability franchise, with a rising mix of retail deposits. The CASA 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 GNPA/NNPA ratios moderating to 2.8%/1.2% as of Q4FY23.
We expect asset quality ratios to improve further and expect PCR to improve to 70% by FY25 . We estimate Equitas SFB to deliver FY25E RoA/RoE of 2.1%/16.7% and value it at Rs 105. Equitas SFB reported a robust loan growth of 33% y-o-y in FY23. The bank has been focusing on building a diversified loan book, with SBL, vehicle finance, MFI and housing finance being the key business segments.
It has posted a 25% CAGR in AUM over the past two years, led by steady trends in vehicle finance, SBL and MFI segments. Housing finance saw a 70%+ CAGR, albeit on a low base. The bank expects a 40% CAGR in affordable housing over FY23-25. Equitas SFB sees a huge opportunity in vehicle finance and expects the segment to be one of the key drivers of loan growth while SBL and MFI maintain healthy growth traction.
The bank has made good progress in reducing the concentration of MFI loans, which moderated to 18.8% of AUM in FY23 from 53.6% in FY16. The mix of vehicle loans has remained broadly stable at 25%, while the mix of SBLs has increased to 36% from 18% over the similar period. The mix of housing loans too has increased and now constitutes 10% of AUM. Disbursements in the MFI and vehicle loans have started to pick up.
Thus, the bank expects MFI mix to remain broadly stable, with MFI contributing 15-20% of AUM. However, it expects the vehicle loan mix to increase further. The bank intends to grow the unsecured PL and credit card segments by focusing on the prime segment; however, it aims to limit the overall mix of unsecured loans to <20% so as to maintain stability in the overall book. We believe that the bank has been successful in building a diversified franchise, which will enable it to report healthy loan growth. Steady AUM growth has been led by healthy traction across segments, while the moderation in credit costs has boosted earnings. As a result, the bank reported RoA/RoE of 1.9%/~12% in FY23.