ESAF Small Finance Bank (ESAFSFB.NS) Q3 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to ESAF Small Finance Bank Limited Q3 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Dr. K. Pal Thomas, MD and CEO of ESAF Small Finance Bank. Thank you, and over to you, sir.

Thank you. Thank you. Good morning, everyone, and welcome to ESAF Small Finance Bank's Q3 and 9 months FY '26 earnings call. On behalf of Board and management, I thank you for joining us today and for your continued interest in ESAF Small Finance Bank. Joining me today are my colleagues, Mr. George K. John, Executive Director; Mr. Gireesh C.P., EVP and CFO; and Mr. Hari Velloor, EVP. At ESAF Small Finance Bank, financial inclusion and serving the underserved has always been the bedrock of our purpose. At the same time, we are consciously strengthening the balance between social impact and sustainable profitability. Over the last few quarters, our strategy has been focused on building a stable, diversified and resilient balance sheet supported by disciplined execution and risk calibration. Our focus on secured lending, granular deposits, operational efficiency and technology-led service delivery is now clearly visible in our financial performance. Accordingly, we have intensified our focus on diversified product portfolio, strengthening our distribution network and enhancing service delivery standards. This has allowed us to deepen our presence across rural, semi-urban and urban geographies, while serving a wider customer base with greater efficiency and consistency. We are building a sustainable and diversified lending business with a shift to secured lending, which is important for long-term stability and growth. At the same time, we are adding new customers and increasing our connect with existing customers to further bolster our CASA and deposit base. A key highlight of our transformation journey has been the successful execution of our MARG strategy, which represent M, MSME, A for Agri, R for Retail and G for Gold loans. This strategy reflects our deliberate shift from unsecured to secured lending. At ESAF Small Finance Bank, our operations continue to be guided by strong governance, transparency and responsible banking practices. We remain committed to maintaining high standards of disclosure and risk display while creating sustainable long-term value for our shareholders. At the same time, we stay true to our founding purpose of fostering financial inclusion and enabling meaningful socioeconomic progress across the communities we serve. On the macro front, the Indian economy continues to witness strong growth momentum driven by robust domestic demand, lower inflation and structural reforms related to GST and labor. This has been supported by various regulatory and monetary measures announced by RBI that are largely aimed at strengthening the entire banking sector. Q3 FY '26 business numbers mark a turnaround in our business performance with PAT turning to positive territory and both gross NPA and net NPA reducing significantly. We will continue to work towards improving cost efficiencies and strategically increase disbursements, especially across secured lending segments like gold, MSME, mortgages, vehicle and agri loans. This strategic shift is strengthening our asset quality, reducing portfolio concentration and derisking the business, thus enabling sustainable growth. I now invite our Executive Director, Mr. George K. John, to take you through the next segment.

Thank you, Paul sir, and good morning, everyone. Let me begin by briefly outline the recent regulatory backdrop. In the December Monetary Policy Committee meeting, the RBI reduced the repo rate by 25 points to 5.25 percentage while maintaining a neutral stance. This marks a cumulative rate cut of 125 basis points during 2025, supported by a sharp modernization in inflation and a stronger-than-expected economic recovery. The overall macro environment remains conducive with improved visibility on credit growth across the system, which is expected to benefit the bank sector meaningfully. Moving to our bank performance in Q3 FY '26 reflects a clear improvement across key parameters. The quarter witnessed a return to profitability, supported by normalization in asset quality and significant reduction in NPA levels. We also saw sequential improvement across core business metrics, underscoring particularly of strategic actions undertaken over the past few quarters. So of 31 December, 2025, our total business led INR 44,686 crores, registering a healthy year-on-year growth of 10 percentage compared to INR 40,706 crores last year. During the same period gross advances grew by 13 percentage while deposits increased by 7 percentage resulting balanced growth across both sides of the balance sheet. Disbursements witnessed strong momentum, recording a growth of 134 percentage Y-o-Y and 14 percentage quarter-on-quarter. This growth was broad-based across segments and clearly reflects the strength of underlying demand as well as the successful execution of our strategy towards secured high-quality lending. We have made meaningful progress in reshaping our portfolio mix. In terms of our BSB strategy, the microfinance group has been rationalized from INR 10,000 crores in Q3 FY'25 to INR 7,500 crores in Q3 FY'26, enabling a greater shift towards secured and better rated assets. This enhanced portfolio affiliates reducing volatility and supporting sustainable long-term growth. As a part of BSB strategy we have defined a progress growth framework called MARG detailed in the Slide 5 of our investor presentation. MARG is a substitute signified direction and this framework reflects our clear strategic path towards secured lending led by MSME, agri, retail and gold loans. This shift is strengthening portfolio quality and long-term resilience and as an advantage of this portfolio confirmation is that all the constant segments under MARG framework exhibits significantly lower NPA levels. Together the segments now account for nearly 60 percentage of our total advances. Among them, gold loans have emerged as a standard performer, recording a strong growth of 89 percentage year-over-year and 15 percentage quarter-on-quarter, reflecting sustained demand from rural and semi-urban customer base. As a result of this focused strategy secured assets now constitute 60 percentage of our gross advances compared to 45 percentage a year ago. We remain firmly on track to achieve our stated part of 70 percentage secured portfolio by March 2027. The steady improvement in the secured asset mix over the last 5 quarters nearly validate the effectiveness of our strategy in building a more resilient high-quality portfolio with stable yield and lower credit cost. I'll discuss our distribution footprint continues to be one of our strongest differentiators. 780 banking outlets, 790 ATMs over 1,042 customer service centers and 31 interest in business correspondents across 24 states and 2 union territories. This enabled the customer reach and connect. On the microfinance front, after nearly 5 quarters of industrial-wide stress we are now seeing a clear sign of stabilization. Production efficiencies have improved sequentially and the overall operating environment has begun to normalize, supported by better borrower behavior and tighter industry discipline. We are leveraging this improving macro environment to a focused and calibrated strategy for our MFI portfolio. This includes regarding the meeting process to strengthen field level engagements, targeted acquisition of quality customers, structured graduation from group loan to individual loans, a calibrated risk approach to fresh disbursements and intensified follow up on the legal accounts. We remain confident upon stability and long-term potential of our microfinance portfolio. With improving cost returns, disciplined underwriting and a strong risk management framework, the portfolio is now on a much stronger footing. As we continue to execute on our priorities of derisking the balance sheet, enhancing asset quality and improving operational efficiency. We are well positioned to deliver sustainable and high-quality growth supported by continued investment in technology products and custom service. The improvement in business performance during the quarter clearly reflects the impact of our further strategic actions and disciplined execution. The bank has returned profitability during the quarter, supported by a meaningful reduction in GNPA level, moderation in slippages and improved operating efficiency. This turnaround has been driven by tighter credit underwriting, calibrated disbursements, strong profit performance and sustained focus on portfolio quality. The sequential improvement across key financial parameters, including profitability and asset quality is a direct outcome of management's strategic initiatives and the consistent efforts of team across the bank. The improvement in asset quality metrics, coupled with better cost control and a healthier business mix reinforce our confidence in the sustainability of this recovery. We believe the progress achieved during the quarter marks a structural improvement rather than one-off and position the bank well for continued improvement in profitability and return ratios going forward. ESAF 2.0 StratoNeXt IT digital transformation remains a key strategic initiative will go live targeted for Q2 FY '27. Beyond improving operational efficiency and scalability, the program is focused on strengthening risk management, regulatory compliance, better governance and controlled frameworks. This transformation will enable better monitoring, improved profitability and stronger compliance alignments while supporting sustainable growth and improved customer experience. I will now invite our EVP and CFO, Mr. Gireesh C.P. to take you through the financial performance.

Thank you, sir, and good morning, everyone. I thank all the participants for taking time for joining us on this call. Let me give you an overview of our financial performance highlights of Q3 FY '26. As of Q3 FY '26, cross-sell deposits stood at INR 24,006 crores, reflecting a moderate year-on-year growth of 7 percentage as compared to INR 22,415 crores last year with a healthy CD ratio of 83.5 percentage. Our continued focus on building a stable and granular deposit base is clearly reflected in the strong performance of retail deposits, which increased from INR 22,426 crores to -- from INR 20,737 crores a year back, registering an 8 percentage of Y-o-Y growth. Retail deposits now constitute 93 percentage of total deposits as of Q3 FY '26, underscoring the strength, stability and granularity of our deposit franchise. CASA balances grew to INR 6,030 crores in Q3 FY '26, registering an 8 percentage Y-o-Y growth with the CASA ratio improving to 25.1 percentage. The moderation in deposit pricing in line with soft interest regime has begun to reflect in a lower cost of funds. Our sustained focus on customer acquisition, service quality and branch-led expansion continues to support stable and granular CASA growth. Gross advances increased to INR 20,679 crores from INR 18,291 crores a year ago, reflecting our measured approach to growth, which is consistent with on a month-on-month basis from Q2 onwards. Quarterly disbursements stood at approximately INR 13,000 crores, growing strongly both year-on-year and quarter-on-quarter. Secured lending constituted 81 percentage of the total disbursements marking the fifth consecutive quarter where secured assets formed over 75 percentage of new lending. This is a direct outcome of our MARG strategy focused on MSME, agri, retail and gold, which continues to strengthen asset quality and improvement in portfolio resilience. The secured portfolio led by MARG strategy continued to perform strongly on both Y-o-Y and Q-o-Q basis, reinforcing the success of our strategic shift towards secured lending. The unsecured portfolio declined by 24 percentage Y-o-Y and remained stable sequentially, reducing the share 37 percentage of the total advances from 55 percentage last year. With asset quality stabilizing, our focus is now firmly on disciplined growth, improved recoveries and strengthening portfolio quality, ensuring healthy margins. Net interest income improved to INR 432 crores in Q3 FY '26 from INR 372 crores in the previous quarter, driven by healthy loan growth, coupled with lower slippages. Quarterly net interest margin improved to 6.6 percentage from 5.9 percentage despite a higher share of secured lending and further rate cuts of 25 basis points in Q3. The benefits of lower cost of funds and improved fund deployment in loan book outweighed the marginal yield compression, resulting in healthier margins and improved earnings level. The bank has a healthy comeback and started delivering a strong improvement in operating performance with pre-provisioning operating profit to INR 253 crores, which is up by 171 percentage sequentially and 98 percentage on Y-o-Y basis. This has supported by managing slippage and NPA sales, coupled with robust business growth, improving the cost efficiency and securing higher fee-based income. Noninterest income grew 86 percentage Q-o-Q and 137 percentage Y-o-Y, reflecting enhanced operating leverage and the benefits through scalability of the business model and ARC sale. The improvement in asset quality during Q3 FY '26 reflects the strengthening of the portfolio, leading to lower slippages apart from the sale of NPA. Gross NPA declined to 5.6 percentage and NPA to 2.7 percentage while slippages reduced sharply to INR 219 crores from INR 509 crores -- INR 505 crores in Q3 FY '25. This improvement has been supported by stable microfinance performance, disciplined credit underwriting and increasing contribution of secured lending under our MARG strategy. These developments reinforce the ability and strength of our risk management framework and the sustainability of our asset quality improvement. Our focus going forward is to further strengthen asset quality by reducing both GNPA and NNPA to improved levels. This will be achieved through disciplined credit delivery, improved monitoring and a cautious approach to microfinance lending, accelerated recoveries and continued growth in secured assets under MARG framework. Together, these actions will enhance balance sheet strength and will drive towards sustainable profitability. Q3 FY '26 represents an important inflection point for our bank with a return to profitability and a PAT of INR 7 crores. With improving operating metrics and normalization of credit costs, we expect to deliver that trend in the coming quarters ahead. FY '26 remains a year of consolidation for the bank with emphasis on improving asset quality, strengthening operating metrics and pursuing disciplined growth. Our continued focus on productivity enhancement, cost optimization and balance sheet strengthening is yielding positive outcomes. With the operating environment stabilizing and our strategic initiatives gaining traction, ESAF SSB is well positioned to drive the next phase of sustainable affiliate growth. Thank you very much. The floor is open for question and answers.

[Operator Instructions] The first question is from the line of Deepak Poddar from Sapphire Capital.

Yes. Am I audible, sir?

Yes, sir. You are audible.

So just a few things I wanted to understand. Now with your gross NPA reducing and even slippages have come down considerably. So by when we should see normalization of credit cost or a declining trend as such?

Credit cost will get normalized in the next financial year itself.

Okay. I mean will it be visible from first quarter, fourth quarter?

Yes, it will be from next -- I mean, it's already moderated on a quarter-on-quarter basis or on a month-on-month basis, it has already got moderated. And by next year, Q1 itself, it will be at a comfortable stage.

Okay. So from first Q FY '27, a visible improvement may be seen, right, I mean, in terms of the credit cost?

Yes.

And what's the normalized credit cost now given your already 63% is your secured book, right? So what would be a normalized credit cost given the current portfolio mix?

It will be somewhere around 2% to 3%.

2% to 3%?

Yes.

Okay. Okay. Understood. And how do we see the ROA profile now given, I mean, a change in our mix of portfolio. So I don't consider the ROA that you used to do, I mean, at a higher MFI book share can be repeatable with the current portfolio mix. So what is your steady-state ROA profile that you expect given the current profile -- portfolio mix?

Yes. Getting the ROA stabilized, it will take some more time because there is some backlog to be absorbed in the P&L. And on a normalized level, we hope that the ROA will be somewhere around 1.5 percentage to 2 percentage going forward on a steady state.

Okay. And this we can expect in FY '27 itself or it will take more time for normalized?

FY '27 it may not have the full impact. FY '28, you will have the full impact as things stands today.

By FY '28, okay.

Yes.

Okay. Understood. And any sort of outlook you want to share for FY '27 in terms of growth and all? How should one look at the loan book growth?

'27, we expect that the loan growth will be somewhere around 25 percentage around.

And this year, where we look to end FY '26?

This year will be maybe around 15%...

As of now, we are at 14 percentage. So based upon some growth will happen.

Okay. So 15%, 16% would be a fair assumption?

Yes.

Okay. Okay. And just one last thing. Given the current improving situation, quarter-on-quarter, we would see improvement in terms of your performance, whatever we have done, let's say, in third quarter. Quarter-on-quarter, we should expect some improvement?

Yes, definitely, you can expect a quarter-on-quarter improvement in all parameters.

[Operator Instructions] The next question is from the line of Chinmay Nema from Prescient Capital.

Hope I'm audible?

Yes, sir. You are audible.

Sir, could you please share the write-off numbers on the microfinance book for 9 months FY '26?

This year, we have not done any technical write-offs. We have only had some ARC sale.

Sir, could you share the number for that? What would be the total number in the 9 months?

Yes. It is INR 1,000 crores, INR 1,018 crores.

Got it. And secondly, could you share the net NPA number on the microfinance book? So we do report the gross NPA number, but if you could also share the net NPA number on the microfinance book?

The number we will share.

Okay, sir. Sure.

[Operator Instructions] Ladies and gentlemen, that was the last question. I would now like to hand the conference over to the management for the closing comments.

Okay. Thank you. Thank you very much. So as we have been communicating throughout the year and as mentioned earlier also, FY '26 will be a year of consolidation for the organization. We believe we have taken the right strategic steps and hopefully supported by positive microfinance environment, we can expect to see continued growth. I would like to again thank all the participants, investors and analysts for taking the time out for this conference call today. In case you have any follow-up questions or inquiries, you can always reach out to our Investor Relations team. Thank you very much.

Thank you. On behalf of ESAF Small Finance Bank Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.

Thank you.

Thank you.

Thank you.