Axis Securities initiates coverage on Equitas Small Finance Bank with buy rating


Axis Securities has expanded coverage on small finance banks and initiated buy recommendations on Equitas Small Finance Bank and Ujjivan Small Finance Bank (UJSFB). Axis has a target price of 41 for Equitas Small Finance Bank shares which currently trade around 34.60 levels.

The shares of Equitas Small Finance Bank were listed on stock exchanges NSE and BSE with effect from November 2, 2020. The listing of the banking subsidiary of Equitas Holdings has been in compliance with requirements of guidelines of licensing of small finance bank by the RBI.

“Both the banks are well positioned to gain from the small finance bank transition process, with most of the transitional risks now abated. The transition has paved the way for both the banks to diversify their portfolio thus providing ample growth opportunities and improve their liability mix. We expect the banks to have first movers advantage given the early commencement of business, as both Equitas Small Finance Bank and Ujjivan Small Finance Bank have a more diversified product suite as compared to most other SFBs,” the brokerage said.

In terms of deposit traction, Axis Securities expects both these banks will largely benefit from the strong brand image in the home market to build a sticky customer base.

Equitas Small Finance Bank had reported over two-fold jump in net profit at 103 crore in the second quarter ended September of the current fiscal year on healthy core income and fall in bad assets. It had posted a net profit of 49 crore in the corresponding quarter a year ago.

“The compliance with the RBI guidelines regarding dilution of promoter stake to 40% at the end of 5 years of commencement of small finance bank operations was a major overhang for both the banks. Currently, the promoter (holdco) holds 82.1% and 83.3% in EQSFB and UJSFB respectively. However, the recent RBI Internal Working Group (IWG) draft report recommends the harmonisation of SFB guidelines issued in 2014 and 2019 on-tap SFB licensing guidelines,” Axis Securities said.

“The 2019 guidelines state that promoter shareholding for first 5 years should be “at a minimum 40%” of paid-up voting equity share capital vs “brought down to 40%” under 2014 guidelines. If this recommendation is accepted without any modification, the 2019 on-tap SFB licensing guidelines would apply to both the banks. We believe this would be positive for both EQSFB and UJSFB as it would imply that the promoter holding should be at a minimum of 40%, which it currently is. Thus the major overhang of reducing the stake to 40%, would be done away with,” the report said.

On Equitas Small Finance Bank shares, Axis Securities said: “We initiate coverage on EQSFB with a BUY rating given the visibility in improvement in ROA/ROE to upwards of 2%/16% respectively in the long term with operating leverage kicking in. A strong non-microfinance led AUM growth, ramp-up in low-cost deposits on the back of a revamped liability strategy and an experienced and competent management and leadership team are key positives.”

“The bank has in the past (as a NBFC) managed to navigate through unprecedented tough situations like the AP microfinance crisis and demonetization without any major hiccups and has emerged stronger. Despite catering to the low and middle-income individuals with limited or no access to formal banking and operating in segments characterized by higher NPAs (used vehicles form 17% of portfolio), the bank has maintained its asset quality at sub-3% levels, only marginally higher than peers. The cautious lending approach of the management, the cash-flow based profiling and strong credit underwriting and risk management framework give us the confidence that EQSFB would be successful in maintaining its asset quality in the long term,” the brokerage said.

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