Equitas Small Finance Bank Limited (EQUITASBNK) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to the earnings call of Equitas Small Finance Bank Limited Financial Performance for Q3 FY '26. We have with us today Mr. P. N. Vasudevan, M.D. and CEO; Mr. Sridharan N., CFO; Mr. Jagadesh J., Head of Assets; Mr. Murali Vaidyanathan, Senior President and Country Head, Branch Banking, Liabilities, Product and Wealth; Mr. Gopalakrishnan G., Head Treasury; Mr. Suresh, Head Strategy and Business Intelligence; Mr. Sundararaman D., Head, Investor Relations; and Mr. Abeshek, Specialist Investor Relations. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. P. N. Vasudevan. Thank you, and over to you, sir.

Thank you. Good morning to all of you, and thank you for taking your time out to attend this call. I'm happy to start off by saying that many of the initiatives we had talked about a couple of quarters back have started yielding results. In Microfinance initiatives such as rolling out the monthly repayment mode with EMIs till the 15th of the month, which forms around 63% of the book today, focus on acquiring new-to-credit and new-to-bank customers who have lower leverage and reducing caseload per staff, combined with improved lending discipline in the industry and the strict implementation of MFIN guardrails by all the players have resulted in significant improvement in performance of this book. The X Bucket collection efficiency on a PPoP basis, has moved up to 99.4% in December. And the percentage of book slipping into NPA over the last few months has seen a sharp reversal. Microfinance today contributes about 8.5% of the total advances, excluding the direct assignment purchase of MFI Agri pool that we did in Q3. And we keep -- we aim to keep this Microfinance at around 10% of the advances level on an ongoing basis. All other businesses have shown continued improvement. Small business loans, which showed some stress in Karnataka specifically, maybe about 2 to 3 quarters back, has seen a significant improvement. Overall delinquency in SBL has come back to near normal. Disbursement also has been picking up and portfolio quality across all parameters have shown good improvement over the last quarter. This enables us to continue growing this book strongly on an ongoing basis. Other businesses are also doing well, and Jagadesh will cover those more in detail. On liability, we had 18% growth in deposits in Q1. We had to take the pedal off the deposit growth to prevent excess liquidity in the system. But we ended up with just 7% growth in deposit in Q3 and now need to increase the momentum on deposit growth to support the increased advances growth. Murali would cover steps being taken to bring the deposit growth back to the earlier levels. The cost of funds has been coming down and presently stands at about 7.13%. It's expected to go further down before stabilizing as more of the old deposit gets replaced with lower-priced new deposits. In terms of capital adequacy, we are placed comfortably at about 20.47% capital adequacy ratio. During Q3, we took some initiatives to conserve capital, such as increasing the IBPC outstanding from INR 1,250 crores to INR 2,000 crores as well as getting about INR 1,690 crores of vehicle finance covered under CGMSC (sic) [ CGFMU ] guarantee scheme. This not only supports us in terms of credit cost in the future, but also releases capital to the extent of the guaranteed portion of the principal. With these initiatives continuing into the subsequent quarters, along with better internal accruals that we expect to generate going forward, we do not expect a capital expansion requirement in the first half of the next financial year. We will review the situation in the second half and take a call at an appropriate time. We have delivered a better-than-expected ROA of 0.65% for Q3 after taking into account around INR 29 crores of impact due to the new labor code implementation. But for this onetime impact, the ROA would have been in the range of around 0.8% and cost to income would have been at about 70% level. We have guided for a 1% exit ROA for the fourth quarter, and we believe that we are in line for delivering that. On advances growth, we have guided for a 15% growth for the year against 12% growth in Q3. That is I'm talking of without taking into account the DA purchase in Q3. Along with the DA purchase, the advances growth has been 16% in Q3. But if you remove the DA purchase, it is 12% in Q3, and we have guided for a 15% full year growth, and we believe that we should be in line to deliver that. Overall, with the impact -- we had a big impact in the income in the last 2 years because the MFI portfolio mix, which was 20% in March '24 was dropping over the last 2 years to reach 8.5% now. So there has been a drop in income impact that we have seen over the last maybe 6 quarters or so. But with that kind of coming to an end and the microfinance 8.5% expected to stabilize around the 10% contribution level and the rest of the portfolio seeing all-round improvement, we believe that we are well positioned to deliver consistent and improving performance going forward. Thank you. And with this, I hand over to Sridhar.

Thanks, Vasu. Good morning, everyone. Thank you for joining us today for the Q3 FY '26 earnings call of our bank. I appreciate your continued interest and support. Let me take a few minutes to walk you through the financial performance for the quarter. Most of these details are also available in our investor presentation. We reported a net interest income of INR 852 crores and other income of INR 285 crores, bringing our total net income to INR 1,137 crores for the quarter. Total net income grew by 8% Y-o-Y and 14% Q-on-Q. NIM has significantly improved by 43 bps Q-on-Q basis to 6.72% in Q3 FY '26 as compared to 6.29% in Q2 FY '26. The bank reported a PAT of INR 90 crores, a growth of 36% Y-on-Y and 273% Q-on-Q. This is after making a onetime incremental provision of INR 29.5 crores due to the implementation of new labor law codes in Q3 FY '26. Return on assets and return on equity for Q3 FY '26 were at 0.65% and 6.1%, respectively. In terms of asset quality, gross NPA reduced by 20 bps Q-on-Q at 2.62% in Q3 FY '26 as compared to 2.82% in Q2 FY '26. Net NPA reduced by 7 bps Q-on-Q to 0.88% in Q3 FY '26 as compared to 0.95% in Q2 FY '26. Credit cost also has reduced to 1.88% in Q3 FY '26 as compared to 2.16% in Q2 FY '26 and 2.65% in Q3 FY '25. Our provision coverage ratio remains healthy at 61.1%, and we expect credit costs to taper down by Q4 FY '26. Moving to the advances book. Gross advances grew by 16% year-on-year to INR 43,268 crores, driven by robust disbursement. The disbursement for the quarter stood at INR 6,557 crores with a strong momentum across all verticals. On the liability side, total deposits grew 7% year-on-year to INR 43,668 crores, and our CASA ratio remained stable at 30% and retail deposits now constitute 73% of the total deposit base. As of December 31, 2025, our capital adequacy ratio stood at 20.47%. With this handing over to Jagadesh.

Good morning to you all. On the asset business, for the quarter 3, we have demonstrated a notable improvement compared to the performance in the preceding 2 quarters. This positive momentum was predominantly driven by the growth in non-Microfinance segments and the strategy of risk calibrated expansion. And also the shift towards the certain product segment contributed significantly to the overall better results for the quarter. Let me walk you through some key highlights. On the advances front, we have grown 16% year-on-year and 11% quarter-on-quarter. This is primarily driven by the healthy uptick in disbursements. Microfinance and Micro Loan advances includes purchase of agri assets under direct assignment deal of INR 1,343 crores. Excluding this direct assignment deal, overall bank advances grew by 12% year-on-year and 7% quarter-on-quarter. On the disbursement front, we have delivered the highest ever quarterly overall disbursement of INR 6,557 crores, which is a growth of 28% year-on-year and 22% quarter-on-quarter. And Microfinance disbursement have surged 72% quarter-on-quarter to INR 1,173 crores in this quarter, helping us to maintain MFI portfolio at around 9% of our overall advances mix. On the non-MFI front, we have delivered our highest ever quarterly disbursements of INR 5,385 crores in quarter 3, which is a growth of 35% year-on-year and 15% quarter-on-quarter. Our non-MFI, which is a secured book now stands at INR 38,108 crores, marking a 19% year-on-year growth. Our small business loans, which continues to be our largest contributor, growing at 14% year-on-year. And notably, the secured business loans saw a robust 22% year-on-year growth. And on the vehicle finance, our strategic focus remains on the used CVs and used cars. Our used commercial vehicles grew at 23% year-on-year and used cars posted a strong 36% year-on-year growth. And on the affordable housing, we grew at 17% year-on-year and 6% quarter-on-quarter at INR 5,360 crores. On the MSE book, we grew at 35% year-on-year and crossing INR 2,000 crores. Microfinance portfolio, excluding DA stands at INR 3,800 crores and is expected to grow driven by the improved disbursements. On the yield and asset quality front, the yield on gross advances declined by 10 bps quarter-on-quarter to 15.63%, primarily due to the lower contribution from the MFI mix. On the non-MFI yields, it's declined by 9 bps quarter-on-quarter to 14.97%, mainly due to the portfolio recalibration. On the asset quality, net slippages significantly reduced to 2.52% in quarter 3, down from 3.78% in quarter 2. We reported the lowest net slippages for the bank in the last 6 quarters. Credit costs saw a sharp decline to 1.88% compared to 2.16% in quarter 2 of the financial year '26. In Microfinance, 1 to 90 DPD improved significantly to 2.14%, down from 5.40% in quarter 2. This is driven by the enhanced collection efficiency. As stated earlier for the current financial year, we are in line with our stated advances growth of about 15% year-on-year. This is excluding the DA driven by the improved disbursements. Thank you, and I will now hand over to Mr. Murali.

Good morning. Thanks to you all for joining this call. While the numbers are there, let me take you through some numbers, which is very important for all of us to get a grip of things. Last quarter, we did rate tweaking strategically because that was the opportunity available for us as we strengthen the proposition across mass affluent, affluent and HNI as a segment. So our cost efficiency in terms of interest payout came through 3 different things. One is on savings rate. Second is on TD rate and then duration shifting from 444 to 888 as an opportunity. So that has helped us to bring the overall cost of funds down. That is one side. But absolute SA, which was at 6.08% as we started the year on April is today somewhere at 5.1% as we exited quarter 3 and TD, which was at 8.48% today is at 7.3%, which means close to 95 bps on TD on repriced book of 65% of the portfolio. And importantly, shifting the consumer from 444 to 888. Last quarter, we did close to 110,000 customers who had 444 in last 6 months to be very precise month-on-month migrating into 888. So there's a conscious effort to build the quality in terms of duration, bringing down the price, enhancing the proposition has been our core driver. And our family banking proposition, which we spoke about, we have now close to 30,000 families of Elite and to expand that Elite to next level, we are creating a product for mass affluent, which is called Elite Lite, which has gone live. And we are also getting into HNI program called ARTHA, which should go live today, tomorrow. So the important message, what we want to tell is we want to strengthen our relationship management. We want to move from only rate-conscious approach to value proposition. And third important thing is how -- what more can I do to the consumer. So as a proposition, we are strengthening the product, distribution and relationship and focused on 3 clear specific segments. On NR, our FCNR has gone live. We have crossed $20 million, $22 million worth of dollar, and we'll be launching our pound-based FCNR next week. And we are seeing a good trajectory at this point of time. And we predominantly at this point of time, we are only focused on giving it to our existing customers. And so is our inward remittance gone live. So AD1 almost through in terms of that. And we specifically launched a product for seafarers, and this is meant for only shippies and which has started well, last quarter end we launched it. And this quarter, we have launched a program for NR also, which is specifically Elite. So Elite as a proposition is going to be, what we want to call as House of Elite, entry for mass affluent, affluent and then HNI. This is going to be our approach in terms of our specific focus on SA. CA, we have some distance to cover. We are coming out with a merchant program as well as asset-centric approach, which we will elaborate later on next quarter. Now last but not the least, gold loans from the branches, signs are very encouraging in line with markets. I think we are disbursing close to INR 100 crores to INR 120 crores a month on a steady state basis. This should only go up. Presently, we are focused as a cross-sell activity. And at some point of time, in the next year, we will have it as a focused activity in terms of new-to-bank sourcing also. With this, I hand over the phone to Gopi, who will give some treasury insights to us. Thank you all.

Thank you, Murali. Good morning, everyone. Markets remain extremely volatile, dominated by global trade and geopolitical uncertainty. Indian equities and rupee markets have underperformed versus global pace. This has mainly been caused by foreign investors exiting equity investments with a further pressure on account of returns being impacted by rupee depreciation. Domestic CPI is expected to remain within the MPC inflation target. Upcoming budget will be closely watched with the market seeking further queues for government stimulus to strengthen growth. Government bonds market saw the benchmark 10-year yields stay roughly flat during the last quarter and closed at 660. With the overall system liquidity remaining tight and pricing in no further rate cuts, benchmark yields further went up during current month. More recently, RBI has announced steps to infuse system liquidity with borrowing rates for banks and corporates spiking in the past few weeks. We continue to be watchful in the near term with heightened volatility becoming the new normal. Coming to Equitas specific, treasury income stood at INR 34 crores in Q3 FY '26. Thank you. Back to operator.

[Operator Instructions] [Operator Instructions] The first question is from the line of Chetan Gindodia from Mahindra Manulife Mutual Funds.

My question is in the other income line item, do we have any income from sale of ARC -- sale to ARC or any other one-off income could be there because sequentially, it has jumped quite a bit.

This is Sridharan here. Yes, other income includes a onetime sort of ARC income of INR 28.25 crores -- INR 31.52 crores.

And with respect to credit cost, if it is possible to share any sort of guidance, how do you look at credit cost for us in Q4 and the year ahead because the slippages and most of the book for us, including SBL and MFI have started performing in line with your expectations. So any light you can share on that?

As we clearly stated, the net slippages was the lowest among the last 6 quarters, and it was on the downward trend. So it clearly indicates that even the credit cost will be on the downward trajectory for Q4.

Okay. Okay. Got it. And TD -- lastly, with respect to TD repricing, so how much of our total book would have repriced as of now? And what quantum of book is left to reprice and how much in terms of cost of fund one can further expect and sort of decline from here.

60% of the existing book has got repriced. And another 20% is due for this quarter, balance will slip into the next quarter. And we are going with -- already, as I said, we have tweaked the rates in line with better than market. And at the same time, in line with RBI, we are 1 cycle behind. As of now, we have saved 98 bps, as I said earlier, on the new price book of the existing portfolio.

The next question is from the line of Rahul Kumar from Vaikarya Fund.

Just one question. What is the PCR coverage ratio, which you are comfortable with? And what is the trajectory of NIM over the next few quarters?

PCR ratio, it's around 67% today. We are reasonably comfortable at those levels. Around that level is something that we are fairly comfortable with. As far as the NIMs are concerned, we did have a sharp jump in the NIM basically because microfinance has stopped degrowing. And for the first time, I think actually it grew quarter-on-quarter from a portfolio perspective. But now microfinance is about 8.5% or 9% of the total book. We expect that to remain at that 9% to 10% level. That's our stated objective. And because of that, we do not expect a downward pressure on NIM any longer because of MFI going down. And the rest of the book continues to grow well. So we should expect our NIM to be -- I mean, I think our NIM is more or less where it will be. Maybe it may marginally tick up a little bit, but somewhere around this range is where we expect it to be.

Okay. Okay. And other expense in this quarter has increased pretty sharply versus last quarter. So what has driven that?

Is it labor code stuff? So there are 2 things. One is that there's been an increased disbursement happening in the quarter, which there is a certain amount of cost associated with the disbursement. And second is INR 29 crores of onetime impact because of the labor code. Yes. So if you see the cost to income is 72%. But if that labor code impact is kind of netted out, it would have been 70% actually. So that was a big impact in the quarter.

The next question is from the line of [ Partham ] from 360 One Capital.

Sir, my question is again on margins. Given that the cost of funds should trend downward from here on because we have repriced our term deposits and also rationalized our SA rates. So -- and just in your previous comment, you guided that [Technical Difficulty]

The voice is unclear. Can you please repeat? The voice was not clear.

Yes, Sir, my question was on margin. Given that we have rationalized our term deposit rates, shouldn't the margins expand from here at least in FY '27 because we'll still have the cost of funds benefit? That was my first question. And my second question was in terms of SBL, when you say that it has normalized. So should we expect the slippages around these levels within the SBL portfolio? Yes, those are my two questions.

Okay. Okay. So on the first point, let me take that. Yes, I mean, there are certain drivers in place for expansion of NIM. One is that the cost of funds is expected to trend down a little bit more over the next 2 to 3 quarters because of the repricing of old deposit to the new deposit. So the cost is definitely expected to go down, which could be one driver for NIM expansion. The second driver for NIM expansion is that microfinance is 8.5%, but we want it to be around the 10% level. So that 1.5% increase in the MFI portfolio mix could be another contributor to NIM expansion. But on the other hand, NIM contraction perspective, if you look at it, our lending yields, the disbursement yield is likely to come down a bit given the overall interest rate scenario in the market. So we may also have to fall in line with that, and there may be some little bit of disbursement yield drop. So that will be the negative side from a NIM perspective. So if you combine all of this, that's what I said in the earlier question asked that from 6.7% that we are in currently, we may expect it to move marginally up a little bit. But right now, we are not actually in a position to guide exactly where it will go and where it will stop. But definitely, we don't see it going down. That's for sure. It might marginally go up in the next few quarters. On the SBL, I'll as Jaggie to.

Yes. So on the net slippages for SBL, if you look at between Q2 and Q3 itself, it has gone down from 2.49% to 1.46% in Q3, okay? So the net slippages is an indication of both the X Bucket and 1-90 DPDs. If you look at the X Bucket efficiency of SBL we are at 99.3%, which has improved from 99% from Q2 to Q3. Similarly, on the 1-90 DPDs, also almost close to INR 100 crores, we have reduced in actual value. And in terms of the percentage, it has gone down from 7.53% to around 7.3%. So based on the combining both these factors, the net slippages will go down in Q4.

And just my last question, the SBL portfolio, your PCR is around 27%. How comfortable are you with that PCR?

Standard...

We are very comfortable with this one because the substandard is one thing actually. And we did some ARC sales. And because of that, it has come down actually, okay? And in addition to that, we are not only in terms of the comfortable...

We are not even putting the provision based on IRAC norms. We have even -- let's say, an example, in certain DPDs between -- up to [ 455 ] we just require a 25% PCR coverage, whereas we are putting almost close to 75% if it is 455. So we are comfortable with that being a secured book.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Yes. Sir, I missed one number you mentioned. So in the third quarter, what was the ARC income you mentioned?

INR 31.52 crores.

It's included in which line item?

Slide #34, asset fee income. It is included in that.

Come again?

Slide #34, asset fee income.

No, no, I'm saying which P&L line item. I mean it's a part of other income?

Yes, yes, yes.

Okay. Okay. Understood. And you mentioned INR 31.5 crores, right? INR 31.52 crores?

INR 31.52 crores, yes.

Okay. Understood. And on the PSLC, I think this quarter, we were close to around INR 34 crores, right, PSLC income. So how should one look at going into fourth quarter? Generally, in fourth quarter, PSLC income is generally higher.

That is treasury and PSLC fee income. So it's largely.

No PSLC income there during the quarter. We have not done any PSLC sale.

So there was...

Only treasury income.

Okay. And fourth quarter, any PSLC income we are expecting?

Doubtful because Q3, we actually had to buy agri portfolio from some of the MFIs to meet our PSL agri requirement. So we had to actually buy because we are a shortfall. But with microfinance disbursement picking up, we expect that in Q4, our own internal business generation should be enough to meet our PSL requirements. Doubtful that we may have excess, which we will be able to sell, doubtful.

Okay. I understand. And in terms of your deposits, I mean, 100% of your deposit, the transmission has been done on your cost of funds? Or is there anything left?

See, we are close to 65% in terms of repricing of deposits as a book as on December. And maybe Q4 exit will be close to 85% level. So that's the outlook.

85% in Q4. So that's the reason you're mentioning that there can be an upward bias on your NIMs?

Yes, slight. So it's one of the levers.

Okay. Okay. Understood. And given -- I mean, the market is doing well and even improvement in MFI. So anything on FY '27, how should one look at your growth and ROA?

Yes. So as we mentioned, we should end up with about a 15% growth for this year. And again, I'm asking, I'm excluding the DA, right? If I add the DA part of it, it might be about 17%, 18% growth. But for the minute, I'm taking the DA out because it's just a onetime one-off transaction. So without that, we should be ending up this year at about a 15% growth. But historically, we have generally grown between 20% and 25% growth on a yearly basis. So going forward, next year, we should look at anything between 20% and 25%.

20% and 25%. And ROA, you are talking about exit ROA of 1%. So how about FY '27 ROA?

So we should expect the next year fourth quarter exit ROA at 1.5%...

Fourth quarter exit.

The next question is from Ashish Agarwal, an individual investor.

Am I audible?

Yes, you are audible.

Okay. So one was regarding this -- our bank looking at the universal bank license, what is our outlook on that?

Well, we have mentioned this in the past also. By March '26, we hope to be meeting all the requirements of the guidelines of RBI for that conversion. So based on the March '26 financials, once we know that we are in compliance with the guidelines, then subsequent to that, we may probably end up applying.

Okay. The other thing is that our -- still our 90% plus of loan book is concentrated to the South India. So what is the plan to geographically diversify, any time lines for that?

Sorry, our [ TN ] as a geography meaning 90%. So what is that? South?

So all the states in South India, right, you have mostly concentration in Tamil Nadu, Karnataka, AP, Telangana. So that -- and we wanted to expand it across India. So any strategy and time lines around that?

If you look at the past 2 years, we have reduced our contribution from TN, okay, which was at around close to more than 50%. It has now come down to 44%. Even we have a clear strategy to reduce further. Maybe in the next 3 to 4 years, it will come down to around 36%. And South, we don't have a 90% book. If you see only Tamil Nadu, we have 44%, okay? And South is around 62%, okay? And Maharashtra is the third biggest state for us in terms of the contribution. So it's not 90%, it's around 60%. That will further come down.

Okay. And this MFI book that we have got, will it be covered by the upcoming central government INR 8,000 crore MFI credit guarantee scheme that they are talking about to be coming in April, I believe.

See, we are already covering our Microfinance portfolio under the CGFMU credit guarantee scheme of the central government. And currently, what percentage? Around 50% of our existing Microfinance book is already covered under the guarantee. And this 50% is the one which is generated after we signed up with the guarantee trust. And going forward, we will continue to be getting the incremental disbursements in microfinance guaranteed under that scheme. As far as this INR 8,000 crore scheme is concerned, of course, the details are not in public space just now. They have not released it. So we'll have to await for the details. But in our view, it is not meant for guaranteeing the individual transactions. It's actually a guarantee cover provided to the banks for lending to NBFC MFIs. I think that's what people talk about. Anyway, we'll have more details as the government publishes it. But that is not meant for individual MFI transaction guarantee. That's already available under the CGFMU scheme.

Okay. And in the commercial vehicle space, do you see -- what is your foresight about increase in this segment because of the signs of tailwinds coming in the CV space?

We don't see any kind of tailwinds. Even if you look at the current quarter, we have shown a good amount of traction in our used segment, which is our prime focus. So we'll be growing on that, even the asset quality have been better compared to the previous quarter.