Stock Fundamentals

Should you invest in Equitas Small Finance Bank IPO?

Radhika Merwin | Updated on October 18, 2020 Published on October 18, 2020

Diversified loan book, strong capital ratio and healthy deposit accretion make it attractive

The long-pending IPO of Equitas Small Finance Bank — the banking subsidiary of Equitas Holdings — appears reasonably priced for long-term investors. The IPO is mainly to meet the RBI’s regulatory norms that require the banking subsidiary to be listed within three years of commencement of operations (by September 2019, which it had failed to meet) and to reduce promoter (Equitas Holdings) stake to 40 per cent within five years — by September 2021. The promoter-holdings have to be reduced further to 30 per cent by September 2026 and to 26 per cent by September 2028, which would imply further dilution.

The IPO is open for subscription from October 20 to 22. At the upper end of the price band of ₹32-33 per share, Equitas Small Finance Bank is valued at 1.2 times book value (as of June 2020, post issue). Ujjivan Small Finance Bank that got listed last year trades at about 1.6 times book. Equitas Holdings currently trades at about 0.6 times book, owing to the holding company discount.

Equitas Small Finance Bank’s diversified loan book, healthy deposit accretion, strong capital ratios and attractively priced IPO make it a good long-term bet for investors.

The IPO is a combination of fresh issue of shares amounting to ₹280 crore (8.5 crore shares), and offer for sale of up to 7.2 crore shares. Post-IPO, the promoter-holding (Equitas Holdings) will come down to about 82 per cent. The management has stated that it may look at various options to reduce promoter stake further to meet RBI’s norms, which include the M&A route (taking over an NBFC/HFC).

It may also consider applying for universal banking licence after September 2021.

Sound fundamentals

Equitas has been among the well-diversified small finance banks, with its non-MFI portfolio at 77 per cent of total loan book as of June 2020, comprising vehicle, housing and small business loans. The company has been de-risking its loan book over the past few years.

Microfinance, which was 53 per cent of the overall loan book in FY16, is down to 23 per cent as of June 2020. This has helped mitigate risk for the company.

In contrast, share of MFI loans (microbanking) for Ujjivan Small Finance Bank is still high at about 77 per cent.

Between FY18 and FY20, the gross advances of Equitas SFB grew by 39 per cent CAGR, led by small business loans (includes housing finance). Small business loans constitute 41.6 per cent of total loans as of June 2020.

The company has also performed well on the liability front, with retail deposits constituting 57 per cent and low-cost CASA deposits (current account savings account) at 20 per cent (of total deposits) as of June 2020. Going ahead, significantly increasing share of CASA could be difficult, which is an industry-wide challenge. However Equitas’ focus on garnering retail term deposits (through attractive rates) should hold it in good stead.

While the company is well-diversified on the loan front, its high geographical concentration is a dampener. As of June 2020, advances towards customers in Tamil Nadu represented 54 per cent of its gross advances and deposits from the State constitute 32 per cent of overall deposits.

Covid impact

After negligible disbursements in April, there was a significant uptick in June. There was also a steady decline in the moratorium book. From about 51 per cent as of June, the moratorium book is down to 36 per cent as on August 31. Moratorium portfolio is defined as the value of EMIs not paid in a month as a per cent of gross advances.

Equitas’ collection efficiency, which dipped to 11-12 per cent in April and May, has bounced back to 83 per cent as of August. While all these are sanguine trends, asset quality will need a close watch in the coming quarters.

GNPA ratio stands at a comfortable 2.7 per cent as of June 2020. But the standstill asset classification during the moratorium period has made it difficult to assess the true asset quality picture.

The pending Supreme Court verdict on the interest waiver case has added to the uncertainty over NPA formation.

Equitas’ asset quality trends in its vehicle finance, MFI and LAP portfolios will need a watch going ahead. As a prudent measure, the bank has made about ₹145 crore of Covid-related provisions (0.9 per cent of its loans).

The company has also increased its provision cover to about 49 per cent as of June from 45 per cent in March. While the provision requirement can go up in the coming quarters, the company’s healthy capital position offers comfort. As of June 2020, the company’s tier 1 capital ratio stood at 21 per cent.

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Published on October 18, 2020
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