BEAR HITS EQUITAS SMALL FINANCE BANK
Equitas Small Finance Bank has released its Q2 FY25 results, reporting a profit of ₹13 crore. This marks a year-over-year (YoY) decrease in profit by 93%, despite a YoY revenue increase of 14.2%. The credit cost for Q2 FY25 stands at ₹330 crore, reflecting a substantial YoY increase of 422%. This spike in credit cost is largely attributed to challenges in the microfinance segment, affecting the entire industry.
The banking industry and small finance banks (SFBs) are facing significant issues within the microfinance lending segment. Banks and SFBs with over 10% of their portfolios in microfinance are experiencing increased provisioning requirements. Examples include IndusInd Bank, Ujjivan SFB, Equitas SFB, and IDFC First Bank.
WHAT IS THE PROBLEM?
In the microfinance lending segment, many borrowers have taken loans from more than three lenders. As a result, the total loans taken by these borrowers often exceed their household income, leading to difficulties in repayment. This has, in turn, created NPAs (Non-Performing Assets) for banks and small finance banks.
Returning to Equitas Small Finance Bank, in Q1 FY25, the bank addressed the microfinance lending issues by creating a substantial one-time buffer provision. Their credit cost in Q1 FY25 rose to ₹305 crore, up from just ₹60 crore in the prior quarter. The profit for Q1 FY25 was ₹26 crore, which has now declined to ₹13 crore in the current quarter. This decline in profit is largely due to industry-wide challenges, which are expected to be temporary. The decision to build up provisions despite the impact on profit demonstrates prudent risk management.
Following the lower profit in Q1 FY25, Equitas Small Finance Bank’s stock price dropped from a high of ₹112 to ₹68. With an even lower profit reported this quarter compared to both the previous quarter and year-over-year, there is a high probability that on Monday, Equitas Small Finance Bank’s stock price could dip below its 52-week low.
VALUATION
The 5-year median P/B ratio for Equitas Small Finance Bank is 2, while it is currently trading at a P/B of 1.3, suggesting it is below its historical median value. The current book value stands at ₹52.6, and if Equitas continues to grow at the same rate, the book value is projected to reach approximately ₹68 in two years.
This article is for educational purposes only. Please consult a SEBI-registered advisor before purchasing any financial instrument.