For Equitas Small Finance Bank, focus shifts to core performance

For Equitas Small Finance Bank

Equitas Holdings Ltd and Equitas Small Finance Bank Ltd have completed their merger. In accordance with the plan, the bank was given 231 shares of the bank for every 100 shares held. Following this, the holding company’s 934 million remaining shares have been cancelled or extinguished, according to a BSE announcement. In order to comply with the RBI regulation, the bank had to start an amalgamation programme between Equitas Holdings and Equitas Small Finance Bank (SFB).

The weight of the promoter holding has been lifted, thus attention is now on the bank’s operations. Another positive is the board’s decision to extend PN Vasudevan’s contract as managing director and chief executive officer of the bank for another three years (subject to RBI clearance).

According to a report by Motilal Oswal Financial Services, “EQUITASB has been focusing on creating a diversified loan book with small business loans (SBL), auto finance, MFI, and home finance being the primary business categories.” With the favourable demand outlook, management is optimistic that loans would expand by 25% in FY23. The bank reported strong loan growth in Q3FY23 across all of its business segments, which resulted in an overall credit (loan) growth of 27% year over year (y-o-y), up from 13% y-o-y in the previous year.

Taking into account the Equitas SFB’s customer base, analysts anticipate that the credit growth will continue in the future. Future credit growth is anticipated to be driven by two important non-microfinance areas, such as small company loans and auto finance. “ While neither of these markets is fully developed, analysts at Motilal Oswal predict that loans will increase at a 26% CAGR over the years FY23 to FY25.

Equitas SFB is in a strong position at a time when the majority of big banks are attempting to raise deposits to meet the demand for loans (CASA). According to Dnyanada Vaidya, research analyst at Axis Securities, “Equitas SFB has the strongest CASA among the listed small financing banks.” Also, nearly 95% of term deposits are non-callable, which gives the bank comfort, especially in the event of rising interest rates. The management of the bank has stated that interest rates on savings accounts may not increase, but that term deposit rates will remain competitive.

The bank’s net interest margins will continue to be at the current levels of 9% in the March quarter thanks to the strong credit growth and steady deposit growth. But, there might be some compression in the future. According to Vaidya, “we see some stress on margins, about 60-70 basis point contraction by FY25, as the bank’s concentration turns more towards a secured portfolio.” She continued, “Yet, the improvement in opex ratios and moderating credit costs to support the lowering in NIMs.”