Equitas Small Finance Bank Q3 Results Review - Mixed; Further RoA Improvement Looks Tough: Yes Securities

Yes Securities Report

Our earnings estimates of Equitas Small Finance Bank Ltd. for FY25/26 have undergone materials cuts due to calibration of loan growth and considering the moderation of credit-deposit ratio.

The challenges around improving return on asset beyond 2% could last for the bank, despite a likely significant loan spread expansion (assuming peaking of deposits cost), on account of moderation in CD ratio, limited room for cost-to-income ratio improvement and full normalisation of credit cost.

A renewed intent to augment provision coverage ratio towards 70% can push credit cost higher. We estimate 25% loan compound annual growth rate, 30% earnings CAGR and stable RoA of 2% over FY23-26.

Return on equity is expected to improve to 17.5-18% by FY26 on rise in leverage. Even on lowered estimates, the valuation is not expensive at nine times price/earnings and 1.5 times price/adjusted book value on FY26 estimates.

Maintain 'Buy' and increase 12 months target price to Rs 125 on rolling over target multiple to FY26.

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