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

Ladies and gentlemen, good day, and welcome to earnings call of Equitas Small Finance Bank Limited financial performance for Q1 FY '27. We have with us today Mr. P.N. Vasudevan, MD and CEO; Mr. Balaji N., Executive Director and Head of Operations and Information Technology; Mr. Mukund Shyamrao Barsagade, 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; Mr. Abhishek, Specialist Investor Relations. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. P.N. Vasudevan. Thank you, and over to you, sir.

Good morning, and thank you for taking the time to join us today. To start with, I'm pleased to introduce our new CFO, Mr. Mukund, who has joined Equitas leadership team recently, after Sridharan, the earlier CFO, had retired after being associated with Equitas for over 15 years. Mukund brings with him extensive experience across finance strategy, business planning with a strong track record of driving financial discipline and supporting scalable growth. We are delighted to have him on board and confident that his experience and insight will contribute significantly to Equitas growth in the next phase. This is Mukund's first earnings call at Equitas and I would like to extend a warm welcome to him. Coming to Q1 of current financial year business performance. Despite a challenging operating environment and continued impact of elevated funding cost, the bank delivered a resilient and steady performance during Q1. Our gross advances grew by 27% year-on-year to INR 47,640 crores, driven by broad-based growth across key asset classes. We continue to see strong momentum in the small business loan, housing finance and vehicle finance, while used commercial vehicle and used car delivered a particularly robust growth of 25% and 30%, respectively. Our Microfinance continues to perform well, reflecting the disciplined portfolio management. The expected collection efficiency in Microfinance remained strong during the quarter at 99.7%, while the 1 to 90 DPD in Microfinance has improved by 14 basis points to at 1.1%, indicating continued normalization of the portfolio behavior. Other products like gold and AHF are also showing traction. Encouragingly, despite the geopolitical tension in West Asia and the associated macroeconomic uncertainties, the quality of retail and vehicle finance portfolio remains intact. We are confident on the stated guidance of 20% plus advances growth for the current financial year. Mr. Jagadesh, Head of Assets, will explain in detail our strategic priorities and growth drivers to achieve this target. On the deposit front, the total deposits grew by 10% year-on-year and 5% sequentially to around INR 48,900 crores. Our CASA ratio stood at 25%, while retail deposits continue to account for a stable 65% of the overall deposit base. While the increase in savings and term deposit rates recently have led to a rise in funding cost by 11 bps sequentially, our focus remains on building relationship-led deposit franchise across retail, affluent, business banking and NRA segments. We are seeing a good traction in the new FCNR (B) as well as retail domestic deposit flow in the current month of July, and we are looking at a better deposit growth in the second quarter. Murali Vaidyanathan, Head of Liabilities, will explain in detail the strategies that drive deposit growth. Our initiatives on IT remain robust. A few key apps such as enterprise LOS and litigation management system are being developed in-house and should be launched during the year. The first few projects using AI are underway, and we expect to see the first feel of the benefit of usage of AI in the bank in the coming couple of quarters. Even though the first quarter is seasonally supposed to be the weakest quarter for the industry, we have seen one of our best performance in the first quarter compared to the same quarter over the past few years, be it in advance growth, credit cost or cost-to-asset ratio. We have guided for a 20% plus advance growth and an ROA of about 1.2% for the full year. The first quarter momentum gives us confidence that we should be able to deliver beyond our guidance on both the fronts. Overall, this performance reflects the strength of our franchise and the execution of our strategic priorities are increasingly reflected in our financial outcomes. The benefit of our balance sheet growth, improving portfolio diversification and sustained progress in asset quality are now becoming more visible across our key earnings metrics. These efforts help us to strengthen the quality of growth, while maintaining a prudent approach to risk and capital management. We had conducted an Investor Day meeting in the month of June and had set out a 5-year vision for the bank, and we remain committed to delivering the same. Thank you. And with this, I hand over to Mukund.

Thank you, sir. Good morning, everyone. As this is my first opportunity to engage with many of you in my role at Equitas, I would like to begin by expressing my sincere gratitude to the Board, our MD and CEO, Vasu sir, and the leadership team for their trust, confidence and support. I would like to extend a warm welcome and heartfelt thanks to all our investors, analysts, and stakeholders who have joined us today. We value your continued interest in Equitas and greatly appreciate the trust and confidence you have placed in us over the years. Let me briefly walk you through the financial performance for the quarter. This will be the summary of the details available in our investor presentation. We reported a net interest income of INR 1,030 crores and other income of INR 250 crores, bringing our total net income to INR 1,280 crores for the quarter. Total net income grew by 19% year-on-year and 3% quarter-on-quarter. Effective quarter 1 FY '27, NIM is reported based on daily average interest earning assets, replacing the earlier methodology based on the average of opening and closing interest earning assets for the quarter. NIM stood at 7.24% for the quarter 1 FY '27, a decline of 12 basis points quarter-on-quarter due to the increase in cost of funds. Total operating expenses were at INR 875 crores, up 16% year-on-year and 5% quarter-on-quarter, reflecting the impact of annual increments during the quarter and increase in the employee count on a year-on-year basis. Cost to assets declined by 14 basis points quarter-on-quarter to 5.61% in quarter 1 FY '27 as compared to 5.75% in quarter 4 FY '26. Cost-to-income ratio stood at 68.38% in Q1 FY '27 as compared to 67.52% in quarter 4 FY '26 and 70.62% in quarter 1 FY '26. The bank reported a quarterly profit after tax of INR 184 crores compared to a loss of INR 224 crores in quarter 1 FY '26. Return on assets and return on equity for quarter 1 FY '27 were at 1.18% and 11.76%, respectively. Moving to the asset quality. Gross NPA reduced by 13 basis points quarter-on-quarter to 2.36% as compared to 2.49% in quarter 4 FY '26. Net NPA increased by 2 basis points quarter-on-quarter to 0.70% in quarter 1 FY '27 as compared to 0.68% in quarter 4 FY '26. Credit costs on average gross advances declined significantly to 1.37% in quarter 1 FY '27 as compared to 6.48% in quarter 1 FY '26. Provision coverage ratio remained stable at 71.02%, including technical write-offs, provision coverage ratio stands at 86.96%. Moving further, gross advances grew 27% year-on-year to INR 47,641 crores, driven by robust disbursement across products. On liabilities, total deposits grew 10% year-on-year and 5% quarter-on-quarter to INR 48,976 crores. CASA ratio stands at 25%. As of June 30, 2026, our capital adequacy ratio stood at 19.44%. Tier 1 capital at 16.01% and Tier 2 at 3.43%. Thank you, and I will now hand it over to Mr. Jagadesh.

Good morning, everyone, and thank you for joining us. Before I begin the deep dive into our advances portfolio, let me briefly touch upon the current situation. As of now, we have not observed any visible stress in our portfolio attributable to the ongoing developments in West Asia. We continue to closely monitor the situation and remain watchful of any potential developments. Business momentum remained steady during the quarter, supported by disciplined underwriting and stable collection performance. Against this backdrop, let me now walk you through the key trends in our advances portfolio. We have closed the quarter with gross advances of INR 47,641 crores, reflecting a growth of 27 percentage year-on-year, which is driven by a strong disbursement growth. Let me walk you through some key highlights. We have delivered the highest ever first quarter disbursement of INR 6,784 crores in quarter 1, a growth of 93 percentage year-on-year. Microfinance disbursement at INR 1,343 crores in this quarter, which constitutes around 11 percentage of the overall loan mix, and we intend to maintain it around 10 percentage going forward. Including DA book, MFI currently stands at 13 percentage. In addition to that, 87 percentage of our organic MFI book is covered under CGFMU. On the non-MFI front, our disbursements were at INR 5,441 crores in this quarter, a growth of 68 percentage year-on-year. Our non-MFI book, which is a secured one, now stands at INR 41,623 crores, marking a 22% year-on-year growth. Our small business loan portfolio continues to be the largest contributor with INR 19,249 crores, growing at 15 percentage year-on-year. And notably, our secured business loans within SBL saw a robust 32% year-on-year growth. And vehicle finance grew 15 percentage year-on-year. And within Vehicle Finance, used commercial vehicles grown by 25 percentage year-on-year and used cars posted a strong growth of 30 percentage year-on-year. Our strategic focus remains on used CV and used cars, which continue to show resilience. Our housing finance grew 24 percentage year-on-year and MSE finance grew by 28 percentage. Coming to the yield and asset quality front. The yield on gross advances increased by 23 bps quarter-on-quarter to 15.74 percentage and non-MFI yield increased by 4 bps quarter-on-quarter to 14.89 percentage. Our asset quality continues to be in an improving trend. Our net slippages at 1.43 percentage in quarter 1, the second lowest among the first quarters over the last 5 years. Our GNPA at 2.36% is lowest among the last 2 financial years. And credit cost stood at 1.37 percentage in this quarter versus 6.48 percentage in quarter 1 of the financial year '26. Adjusting for the INR 29 crores stress sector provisioning reversal in quarter 4 financial year '26, credit costs would have been approximately 1.38% in Q4, broadly in line with the current quarter, indicating the stable underlying credit cost on a sequential basis. In Microfinance, the 1 to 90 DPD declined to 1.10 percentage from 1.34 percentage in quarter 4, driven by enhanced collection efficiency. The expected collection efficiency at the post level was 99.7% in Q1, reflecting the stability. I would like to conclude that even in a seasonally weak quarter, we delivered strong performance in disbursement and asset quality across products. We expect this momentum to sustain in the quarters again. Thank you, and I now hand over to Mr. Murali.

Good morning, friends. I would like to take you through what's happening on the liabilities front. We continue to build a healthy momentum with total deposits growing sequentially 5% and book reaching closer to INR 49,000 crores. And in this, the composition is 25% of that money coming from CASA and CASA plus RTD accounts closer to 66% of our total deposit base. This reflects the strength and granularity of our franchise and bank. It is also noteworthy that 91% of our bulk deposits are non-callable in nature and in a duration of 1 year. This provides a greater stability to our funding profile and limiting the repricing risk, which happens on the same year. The FCNR, we have launched through the AD1 project, which has gone live. Pre-swap and post-swap, we are seeing a healthy traction, and we have crossed close to USD 42 million already. Adding -- this will add the diversified as well as opportunity for customer towards hedging and an opportunity for us to build the dollar balance sheet. On a daily average cost of funds increased by 11 bps. We actually tweaked our sharp pricing, and we have launched a branded FD product called Maxima with 3-year, 1 day as a duration, and that is showing enough traction. So the culmination of both has increased the cost of funds and moving up to 7.05% from 6.94%. We are also encouraged by the response to our recently launched ARTHA proposition targeting HNI and HNI plus. And the proposition as well as segmentation is helping us to penetrate into the HNI segment very deeply and high-value customers are enjoying the premium banking proposition along with the user convenience. In addition to that, we have specific proposition Elite Epic for NRI, which is showing a traction in terms of rupee as well as dollar-denominated feature. And Elite Lite, which we launched 3 months back for emerging affluent is showing in terms of number and value. So both the offerings are witnessing encouraging traction and helping us to expand our reach across key segmentation. So with a strong retail franchisee, differentiated customer proposition and customer segments, along with customer-centric approach towards mobilization of deposits and building balance sheet, we remain well positioned to support the bank's funding requirements as we move forward. Thank you. I hand it over to Gopi.

Good morning, everyone. The quarter went by was very challenging given continued unpredictable geopolitical situation in West Asia, exerting severe pressure on rupee and other domestic assets due to higher crude prices. Financial markets continue to exhibit volatility with uncertainty continuing to impact treasury revenue. Our treasury income stood at INR 31 crores in Q1 FY '27. Foreign investors have retreated to safe haven investments while placing large bets on AI, causing India to miss out on inward dollar flows. Rupee depreciation pressure continues. However, the measures announced by RBI in June to attract external flows have got off to a good start, garnering over $20 billion. In the immediate term, CPA is expected to broadly remain within MPC inflation target skewed towards the upper end. Longer-term effects of imported inflation and this year's monsoon shortfall are likely to see some upside risk materialize against current RBI projections. Government bonds saw the benchmark 10-year yield exhibit heightened volatility during the quarter, closing it at 6.77%. The yields have mirrored the volatility in crude prices and geopolitical cues, and this is likely to continue till a definitive end to tensions in West Asia is in sight. We approach the coming quarter with caution given the continued volatility. Thank you.

[Operator Instructions] First question comes from the line of Heet Khimawat from IIFL Capital Services.

Firstly, on the funding side, maybe Murali sir, you could take this. The share of bulk has gone up in this quarter. And we're also seeing in the last couple of years, the share of individual depositors in our deposit base has been coming down while banks and government body share has been going up. So just wanted to understand what is happening here? And how do we see this trend in the medium term? While also on the cost of funds, we've seen the marginal -- like we just wanted to understand the marginal cost of funding that we would be seeing in this quarter? And how would that compare versus the current cost of funds that we are seeing? And mainly in the near term, in the next 1 or 2 quarters, can the marginal cost remain at the current levels? And would that be higher or lower than the current cost of funds? That would be my first question.

See, first, on the retail to bulk side, there are 3 divisions. We have given it on the slides, which is greater than INR 3 crores to INR 10 crores, INR 10 crores to INR 50 crores and greater than INR 50 crores as a bucket. So in this government bodies and institution, and we have something called cooperative banks. Today, cooperative banks accounts to close to 18% of the book and government bodies and institution contributes to 12% of the book. That is how this 30% of the book is coming in for bulk TD requirement. The expansion into government actually helped us to mobilize. So the overall pie at this point of time looks like 68% coming from individuals as well as HUF and balance 30% coming from institutions. When we pick up, that is recently what we have done on FCNR as well as Maxima pickup, over a period of 6 months, it will gradually come down to earlier thing of either 70-30 or 72-28 over 2 quarters. That is what is expected on the funding side.

Yes. Got it. And just on the marginal cost of fund, basically...

Yes. On the marginal cost of fund side, if you look at it, currently, we are at about 8%. And the current outlook from that point of view, we still believe maybe around this mark only we'll be having it as we move forward as well.

Got it. Got it. Secondly, on the MFI slippages, so we've seen that coming down. However, the non-MFI slippages have inched up in this quarter. So I just wanted to understand if there is any seasonality coming from the vehicle book that we normally see in Q1? Or is this from any other non-MFI segments? And how do we trend -- how do we expect this to trend in the coming quarters?

This is Jagadesh. So slippages has been better compared to the last Q1 of the financial year, okay? If you look at the net slippages, the current net slippages is INR 151 crores, okay? In MFI is INR 30 crores and non-MFI is INR 120 crores. If you look at the last financial year quarter 1, it's INR 453 crores and MFI is INR 230 crores, so which effectively INR 220 crores. It's better compared to the corresponding quarter of the previous year. And normally, the Q1 will be a seasonal. It's based on the seasonal. We see better improvement in the asset quality going forward.

Yes. So mainly non-MFI would be largely seasonal from vehicle maybe and that would be -- I just wanted to understand that. Is there any seasonality in this?

Yes. It's a seasonal.

Got it. Got it. And sir, lastly, on the MFI side, so we had the DA book of around INR 1,340 crores, which came in 3Q. So like what is the rundown that we are seeing? Or by when can we expect this to run off in how many quarters?

Currently, we have at INR 838 crores. By Q4, it would come around close to INR 150 crores.

The next question comes from the line of Vivek Ramakrishnan from DSP Mutual Fund.

You had mentioned about capital optimization a couple of quarters ago, which included CGFMU and so on. But is there any chance of increasing your DA or securitization book so that you can grow while maintaining a slightly higher capital adequacy? Now you're at 16% Tier 1. And so I wanted to know where you'd expect it to be, let's say, in the end of Q4, given your strong growth?

Yes. So there are a lot of levers for capital preservation that we have been using over the last few quarters. So we will continue to do that. In fact, last quarter, meaning the first quarter of this financial year, we did do a DA of around INR 500 crores of the affordable housing book, which released a little bit of capital. We are also actively getting our vehicle finance portfolio covered under CGTMSE, which again releases capital. And then, of course, the IBPC is always a tool available to sell down and preserve the capital and focus on lower risk-weighted assets like housing finance or gold loans to conserve capital. So there are a lot of levers. And we continue to use all the levers available to us. CGFMU, of course, is one more lever. Today, I think out of Microfinance book, our own Microfinance, just taking the DA part of it out, almost 87% of the Microfinance book is covered under CGFMU, which not only mitigates risk, but also releases some amount of capital. So all this is something that we'll continue to do. And so hopefully, that we should -- we don't expect to raise capital -- Tier 1 capital in the current calendar year. For this calendar year, I don't think we'll be raising any capital. Maybe towards the end of the fourth quarter of this financial year or maybe towards first quarter of next financial year, we might look at it. But again, that depends on how much capital we are able to conserve through all these methods. And in the forthcoming AGM, we would be putting up a resolution -- enabling resolution for a Tier 1 capital of INR 1,250 crores, but that is again largely enabling provision. Last year also, we had a similar provision at the last AGM, which was approved by the shareholders. But we were able to manage the capital, so we really didn't raise. This year, again, we'll be coming up with enabling resolution. And -- but the target would be to raise it either in the fourth quarter or first quarter, again, depending on how we are able to conserve the remaining capital.

Sir, the current participant line is disconnected. Should we proceed with the next question?

Yes, yes.

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

Yes, am I audible, sir?

You're audible.

Sir, just wanted to understand, first up, I mean, for the full year, we are still targeting 1.2% kind of an ROA, right? So are we still maintaining exit ROA of 1.5% by 4Q that I think we have mentioned in earlier calls as well?

Yes. So we had guided for a 1.2% for the full year and 1.5% exit for fourth quarter ROA. But if you see our first quarter ROA is almost 1.2%, just a little bit less than 1.2%. And so it does look like our ROA for the full year should be more than our guided range of 1.2% ROA. So we are also looking at a lot of the metrics which go to the ROA tree. And maybe by end of second quarter, we might come with a revised guideline. We believe that our actual ROA for the year should be better than the guided figure -- earlier guided figure. But how much better and what is the likely ROA that we should expect for the full year, we should be able to come back to that maybe by end of second quarter.

Okay. And we still maintain year-end ROA of 1.5%?

I mean that's what we have guided. Definitely that we should be able to deliver. By end of second quarter, we will be able to say whether it can be better than that.

Okay. And anything on FY '28 next year, what sort of ROA we are looking at?

See, the exit quarter, whatever the full year ROA that we will end up for current year, the next year should only be better than that, because all the metrics are looking good. The whole platform has really been laid out strongly over the last 3, 4 years. So whatever be the ROA that we end up this year, next year should be an improvement on top of that.

So, improvement over the exit ROA...

Not exit ROA. I'm saying that for the full year...

Full year ROA.

Whatever ROA we deliver for the full year, next year, full year ROA should be definitely better than that.

The next question comes from the line of Shailesh Kanani from Asian Market Securities.

Sir, a couple of questions from my side. I wanted to check on the growth of gold loan book. It seems to be a little bit some moderation has been there in this quarter, on quarter-on-quarter basis. So how should we think about this? And what should be the year-end target for this book?

See, gold loan, see, we have already informed that we are expanding gold loan into liability branches. Also from the asset branches side, we are enhancing our distribution. So we are closer to INR 1,000 crores. Now on a full year basis, we intend to scale it up to INR 1,600 crores mark. So that's the -- so that's how we are looking at it as we move forward. Of course, there are opportunities to further scale it up as we move forward with the distribution getting enhanced and branches as well. So we will come back on that maybe in subsequent quarters as well how it comes out.

Any reasons for moderation during this quarter?

It's largely seasonal and there's some bit of network expansion what we have undergone. It's taking some more time. But otherwise, the month-on-month disbursements are healthy. So we continue to do healthy numbers there.

This is Jagadesh. So on the asset part of the gold loans, we had to start off with our branch expansion, okay? So by Q2, we'll come up with more branches. And our plans of getting into close to some 120 branches will be done by Q4. So we can able to see the upsurge in disbursements from Q2 onwards.

Okay. Fair enough, sir. And just to repeat that number, INR 2,600 crores is the target for the gold? That is what I heard properly?

It's INR 1,600 crores -- I said INR 1,600 crores this year.

INR 1,600 crores. Okay. Fair enough. Sir, my second question was with respect to liability fee income. That growth on the year-on-year basis seems to be muted. So any steps we are taking to boost that line item?

Yes. See, in terms of product mix in insurance, we are now skewed towards term as well as traditional. And as we know, the commission structures are coming under scrutiny. We are putting a lot of guardrails in terms of focus on solutions based on suitability and also, most importantly, the mix, which should not be driven through revenue. So top line growth will happen and revenue will be a byproduct of top line. That is what we call it as BWRP. That is going to be our approach for this year. And in the coming quarter, we are going to enhance our health insurance proposition within the customer segment. So it's a product of life, general and health. In the first quarter, it was skewed towards general and life. In the second quarter, we will be focused more on health penetration and life ticket size penetration.

Fair enough. Sir, just last question from my side. Any update on the universal banking license?

Yes. So on that question, we are looking at it internally. As of now, we have not put a time line to apply to RBI. We have gone through the RBI guidelines. We have gone through the data of the bank. Technically, it looks like we are in compliance with the guideline requirements. That's what it appears to be for us. But we'll be doing more analysis of that. We will take our time. We are not really in a hurry to file our application at the earliest. We are not in that hurry. We'll take our time. We'll study the guidelines and the bank's position. We'll have dialogues with RBI also. And then we'll take that call as to when we should file. So if you ask me a time line by when we expect to file, we don't have the time line at this point in time. But we will come back to you shortly on that. But we are working on that project as of now.

The next question comes from the line of Ashwani Kumar Agarwalla from Edelweiss Mutual Fund.

Sir, can you explain what was the reason for your decline in NIMs? Can you break it? And the impact of the yield impact because of cost of funds? Yes.

Yes. So from a yield point of view, if you look at it on an average basis, daily average basis, the yield has gone up by 3 to 4 bps on a Q-o-Q basis. On the other side, on a cost of funds, again, on a daily average basis, it has dropped by close to 12 bps. So this has resulted in a NIM drop for the quarter on a sequential basis.

You said, your cost of funds also declined and yields also increased. So your NIMs would increase...

Yield increase was on a nominal basis, around 4 bps on a daily average basis. So the NIM drop is primarily contributed by the cost of funds increase.

And how much by did your cost of funds increase, roughly 16, 17 basis points?

11 bps during the quarter.

Okay. And this -- do you hold any extra liquidity, which can be deployed in the next quarter?

One.

Yes. So during the quarter, a lot of transactions, which has been undertaken by treasury, the IBPC transactions and also we avail some refinance during the back end of the quarter, the last few days of the quarter has contributed to a higher liquidity at the end of the quarter. And that -- we expect that to be consumed in the current quarter. We already saw a significant amount of consumption in the last few days. And then this entire liquidity -- surplus liquidity will get consumed now.

Okay. So what was the drag in the margins caused by that liquidity?

So the drag on a -- since it is on an average -- daily average basis, that drag is very nominal.

And where do you see the margins going forward? One second. Is it likely to improve in the second quarter and for the entire year?

See, from a NIM point of view, currently, we are at 7.24% or it will come down as we move forward, primarily attributed to the increase in cost of funds. So maybe 7.1% levels is what we are looking at NIM on a daily average basis. So that's the mark in the next 2 to 3 quarters we are looking at. Also, I would like to add one more thing is the LCR on a daily average basis, if you look at it, it's 142%. And so this 176% what we are putting in the presentation is on quarter end basis. So relatively, we are comfortable in that liquidity point of view as well.

And NIM is also declining because you're consuming capital. And on a spread basis, what do you -- how much would be the decline?

So yes, 7.24% will come down to around 7.1% NIM as we move forward.

But what about spreads?

From a yield point of view on advances?

Yields on advances minus cost of funds.

So a combination is what I'm saying. So yield, there is a marginal uptick expected as we move forward, but it will be very marginal. But largely, the drag will be from the cost of fund side.

The next question comes from the line of Param Subramanian from Investec.