Equitas Small Finance Bank Limited - Q3FY2023 REVIEW

Equitas Small Finance Bank Limited reported net revenue of ₹1,063.34 crores for the quarter ended December 31, 2022, compared to ₹901.15 crores for December 30, 2021. Profit After Tax was ₹170.13 crores for the quarter ended December 31, 2022, compared to ₹108.11 crores during the corresponding quarter of the previous year, respectively.

STOCK DATA

Equitas Small Finance Bank Limited - OVERVIEW

• The National Company Law Tribunal has approved the merger of Equitas Holdings Limited and Equitas Small Finance Bank, the small finance lender announced on January 17, 2023. The approved Scheme, as authorized by the respective Boards of EHL and ESFBL, was submitted with the ROC on February 01, 2023, by EHL, and on February 02, 2023, by ESFBL. As a result, the Scheme went into effect on February 2, 2023.

• Equitas Small Finance Bank Limited has been assigned A1+ by India Ratings and Research Agency.

SHAREHOLDING PATTERN (%)

Equitas Small Finance Bank Limited - BENCHMARK COMPARISON

BUSINESS

• On June 21, 1993, Equitas Small Finance Bank Ltd was established. Equitas Bank is one of India's major small financing banks. Being a new-age bank in one of the world's fastest developing economies, it provides a wide range of products and services to fulfill the needs of its clients, who include people with limited access to traditional financing channels, Micro Small and Medium Businesses (MSMEs), and corporations.

• Equitas Holdings Ltd, the holding company of Equitas SFB, began operations in the microfinance sector in 2007. In 2011, it expanded into automobile and house financing, and in 2013, it joined the Small Business Loans market. In September 2015, the firm gained preliminary clearance to become an SFB. It received a scheduled commercial bank license in September 2016 and began operating as Equitas SFB.

• The company's product offering comprises asset products advanced to unserved and underserved clients primarily in semi-urban and rural areas, as well as liability products in the form of deposits sourced from mass and mass-affluent customers in urban and semi-urban areas.

• Company has categorized its asset products into (i) small business loans; (ii) microfinance; (iii) vehicle finance loans; (iv) MSE finance (v) loans to corporates; and (vi) other loans. Categorization is largely determined by customer profile, type of security, and end-use.

• Following are the business segment of the company:

  • Treasury:

    • It encompasses all investment portfolios, profit/loss on investment sales, PSLC fees, profit/loss on foreign currency transactions, stocks, derivatives income, and money market activities. This segment's expenditures include interest on money borrowed from both external and internal sources, as well as depreciation/amortisation of premium on HTM category investments.

  • Corporate / Wholesale Banking:

    • It covers all advances to trusts, partnership firms, corporations, and statutory entities not covered by 'Retail Banking'

  • Retail Banking:

    • It comprises retail client loans and deposits, as well as sector earnings and costs.

  • Other Banking Operations:

    • It encompasses any operations that are not covered by Treasury, Corporate / Wholesale Banking, or Retail Banking.

• Out of the total revenue, 9% has been generated from Treasury operations, 3% from wholesale Banking, 86% from Retail Banking and 2% from Other Banking Operations in FY 2022 compared to 11%, 3%, 85%, 2% in FY 2021, respectively.

Equitas Small Finance Bank Limited - SWOT ANALYSIS

STRENGTH

• Customer Centric Organization.

• Among the largest SFB in India.

• Well-diversified asset product portfolio.

• Strong retail liability portfolio with a strategic distribution network.

WEAKNESS

• Inherent geographic concentration.

• Increase in cost-to-income ratio.

OPPORTUNITIES

• Decrease in NPA in recent results.

• Adoption of new technology.

• Decrease in Provision in recent results.

• Trading near a 52-week high.

THREAT

• Increasing in competition in the financial sector.

• Ongoing uneven circumstances globally (e.g., Inflation).

SMALL FINANCE BANK INDUSTRY ANALYSIS

• Small Finance Banks (SFBs) are still a modest participant in the banking sector, with a market share of 1.14% in advances and 0.71% in deposits as of March 31, 2022, but their successful deposit mobilisation and outreach to the underbanked have helped them raise their share.

• SFBs have dramatically expanded their credit deposit ratio, achieved significant loan book diversity, and experienced significant growth in advances by placing a major emphasis on liabilities franchise. It is projected that the non-microfinance portfolio's share will increase considerably over the course of the medium to long term.

• The advances book of SFBs increased at a pace of roughly 40% as compared to private sector banks, which expanded at a CAGR of 18% for the four years ending March 31, 2022.

• The industry's growth rate is predicted to exceed that of FY22 if capitalisation rises. SFB capital raising surged in Q2FY23 and is expected to continue.

• What is Small Finance Bank:

  • Small Finance Banks are a special kind of bank that the RBI established with the help of the Government of India in order to promote financial inclusion by primarily offering fundamental banking services to underserved and underrepresented groups, such as unorganised businesses, small and marginal farmers, micro and small industries, and small business units.

  • Like conventional commercial banks, these banks are able to conduct all standard banking activities, including lending and receiving deposits.

  • SFBs are subject to stringent regulations. The priority sector must get at least 75% of the money that are borrowed.

  • In addition, the lending portfolio should consist of at least 50% loans under Rs. 25 lakhs. In response to the declaration made during the Union Budget for the fiscal year 2014–15, the RBI published the Small Finance Bank regulations in November 2014.

  • On November 24, 2014, just 10 of the 72 firms from diverse sectors who applied for the licence actually received it.

• SFBs are establishing the benchmark for microloans to self-employed people with insufficient credit histories to assess their creditworthine. The group of minor financing banks accounts for 1% of the total assets of the Schedule Commercial Banks (SFBs).

• Throughout the course of the four quarters of 2021–2022, the total deposits and credit of SFBs rose by 32.7% and 23.1%, respectively.

• While the rate of growth for term deposits was 15.7% (y-o-y) in March 2022, the rate of growth for CASA deposits has been aggressively increased by SFBs, rising from 18.4% in March 2019 to 33.9% in March 2022.

• From a low foundation, the substantial balance sheet expansion of SFBs has sparked worries about asset quality. Although it is below the top of September 2021, its reconstructed standard advances portfolio is still higher than it was before the epidemic.

• The concentration of SFB in particular client categories and geographical regions has an impact on these trends. Its CRAR in March 2022, albeit higher than the larger group of SCBs, is still a respectable 19.3%. Gross non-performing assets (NPAs) of SFBs were 5% at the end of March 2022, down from above 6% in September 2021. Meanwhile, their net NPAs decreased from 2.2% in March 2022 to 3.0% in September 2021.

• In the third quarter ending December 2022, the net profit of listed microfinance institutions (MFIs) and MFI subsidiaries of listed enterprises more than quadrupled year on year (YoY) to ₹508 crores.

• As compared to YoY growth, the sequential rate of net profit growth was slower. It was 16.7% more than the ₹435 crores reported in the second quarter that ended September 2022. (Q2FY23). Interest income increased by 25% year on year to ₹2,414 crore, and it increased 9.7% sequentially from ₹2,201 crore in the second quarter ended September 2022. (Q2FY23). The increase in loan offtake, higher rates, and improved recovery all aided MFIs in increasing interest revenue. Finance expenses increased as well, albeit at a slower rate than interest revenue. Finance expenditures increased 12.9% year on year to Rs 939 crore and 12.7% sequentially from ₹833 crore in Q2FY23.

Equitas Small Finance Bank Limited - FINANCIAL OVERVIEW

QUARTERLY SUMMARY

Equitas Small Finance Bank Limited - PROFIT AND LOSS STATEMENT (₹ in Crores)