Equitas gives one more reason to warm up to small corporate banks


Equitas Small Finance Bank Ltd’s first update on June quarter performance encouraged investors. Concern that small financial banks will be hit the hardest by the second wave of the pandemic is now fading and the actions of these lenders are benefiting from the change in sentiment.

Equitas shares had jumped nearly 20% on Wednesday and are also trading in the green today.

On Wednesday, Equitas announced a simple sequential 0.5% contraction of its loan portfolio for the June quarter. In addition, collection efficiency recovered in June, a sign that things could improve. This better-than-expected performance comes close to a similar update from AU Small Finance Bank Ltd. The lender had reported a 2% contraction in loans in its quarterly update.

Granted, disbursements in the quarter collapsed as the lender reported a sequential 50% drop. Despite improved collections in June, the lender experienced a sharp decline in collection efficiency compared to the previous quarter. Of course, the sore point was microfinance loans. Even at 66.9% in June, the microcredit collection efficiency was well below 105% in March. Small business loans and auto loans have also suffered in the same way. Micro and small enterprise (MSE) finance and business loans, however, performed well. The collections in these two categories were 108% and 243% respectively.

Investors should also consider the effectiveness of collection, excluding bad debts. For microfinance and small business loans, the lender was unable to collect more than 70% and 86% respectively. Simply put, loans that were not stressed before are now showing signs of pain. Borrowers who had defaulted show increased stress. “Overall, collection trends would be a key controllable element in the short term,” analysts at Motial Oswal Financial Services Ltd wrote in a note.

The result is that Equitas Small Finance Bank has an asset quality challenge. Indeed, this can also be extended to other small financing banks. The asset quality details that the bank releases in its quarterly audited financial statements at a later date would determine whether investors need to be concerned. For now, a modest valuation seems to be working for the title. Despite recent large gains, the stock is trading below its estimated book value for FY22. AU Small Finance Bank shares are trading at a multiple of 4.6 times.

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