PN Vasudevan’s latest interview explaining their business model in detail.
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Very good interview by ceo
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Interesting Set of Result
Improvevement in Net NPA with growth.
However profitability has taken a hit with a floating provision of 180cr. Can anyone expllain what it means.
Did anyone attend the concal today.
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Bank is going for universal bank license as mentioned in investor presentation
and bank is going through rbi guidelines
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Even after high provisions
There ppop grew by 9 % YOY
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I think ppop is pre provisions operating profit. Provisions will be deducted from this to get profit for the period. As equitas set aside 304 cr as provisions, hence profit after tax is 26 cr
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yes,you are right profit is 26cr
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For au mostly they would get license
But ujjivan still behind as there majority of book is still unsecured
GNPA limit is 3%, not 2%
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yes my bad. you are correct.
What differentiates equitas from another small finance bank is that Their 85 percent loan book is fixed means when rate cut would be there, nims wont fall much.
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RBI hasn’t defined what they consider a diversified book. Do they mean product diversification, geographic, income groups etc? No one knows yet.
If being concentrated in unsecured is not diversified, the same applies to being concentrated in secured. Most of the SFBs, and banks like Bandhan are highly concentrated in their home state which has and can have adverse effects.
So we will need to wait and watch what the RBI considers diversified and safe enough to be given a UBL.
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When rates rise, and the economy’s growth is strong, NIMs compress because competition for deposits rises and CoF increases. Floating rate loans are quickly repriced but fixed rate loans are not and thus NIMs contract. This is what happened with Equitas because as you said they are a majority fixed rate book.
When rates fall, this usually happens in a slowing economy, as the CB may have overtightened, the lender’s need for deposit growth is not as high as credit demand may not be as high as in the scenario above, thus lenders are quick to reprice deposits, CoF reduces. However, the lenders are in no hurry to reprice the loans and pass on the falling rate benefit 1:1. Thus NIMs usually expand in this scenario.
So the default state in a rate cut environment is NIMs expanding and not falling as you have mentioned.
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@hack2abi what advantage does fixed rate loans offer to equitas then?
The only think that I can thing of is that NIM expansion their case would be greater when the rates fall, since they won’t reprise older advances and will reprice deposits immediately?
Has fallen to 52 week low today. Any negative triggers?
- Q1 Results (PAT decline due to higher provisioning)
- Floods in Southern states is another challenging situation for the institution with majority of their loan book from South India
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FY25Q1 Concall Summary
Positives
- Growth in retail term deposit growth, CASA being stable, growth in used cars, housing, SBL. Microfinance had muted growth which is inline with the guidance of reducing it’s weightage.
- CD ratio is healthy and may be bought slightly down. CRM app developed on Microsoft Dynamic platform will be rolled out shortly. Selfie Loan app launched last quarter is seeing good traction will be a good lead generator.
Negatives
- Low Disbursement (especially April); Loan growth was also not that much due to heat wave, elections, confident that it’ll get back.
- Spike in credit cost - one reason is due to higher provisions (to adhere to RBI notice on the requirements to become a universal bank: net NPA < 1%). Second is lower collections due to seasonality.
- Higher slippage in the quarter mainly due to higher slippages in microfinance (~140% jump) and commercial vehicles (70% jump). They’re monitoring microfinance sector closely and expects CV slippages to stabilize. They’ve slowed down disbursement in microfinance which lead to decrease in NIMs.
- Any guidance on credit costs will be given after assessing the second quarter after observing how the microfinance part of their portfolio performs.
- Lower loan growth (17%-18%) compared to the guidance of 25% but confident to achieve the guidance.
- Investments in technology will maintain the cost-to-income ratio at last year’s level.
- During the quarter, there was a technical write-off totaling INR 114 crores, with INR 98 crores related to the microfinance portfolio.
Q&A
- The average yield on advances in housing finance has increased and is now approximately 12%.
- Most of the investments will be done in 3-4 years. Credit cost guidance will be given post second quarter, as they need to evaluate the effects of maintaining a 70% PCR and trends in microfinance collections.
- Cost of fund has 2 parts - the cost of savings accounts and the cost of replacement deposits. Last year higher % of deposits were renewed at higher rates, impacting the cost of funds while this year, less % of deposits are due for renewal, reducing the impact on the cost of funds.
- Despite uncertainty in credit costs, 25% growth guidance is maintained since microfinance will be compensated with growth in secured loans, introduction of personal loans and credit cards.
- The real challenge according to them is maintaining 1.25% credit cost, the spike in VL credit cost will be brought down but the cause of concern in microfinance.
- They’re looking at micro LAP as a mimic to microfinance for similar yields. Slowing down on NBFC, new CV as they’re low yield products and focusing on higher yield products.
- The RBI’s uniform guidelines for microfinance lending have impacted the industry. Under the new guidelines, households with an income of around INR 3 lakh are eligible for loans up to INR 2 lakh, leading to increased indebtedness, driving up ticket sizes and borrower indebtedness quickly.
- Experiencing an extended period of high slippages in its microfinance portfolio, over 9-10 months. It is difficult to predict when conditions will return to normal.
- The microfinance stress is not uniform across India but is concentrated in specific states like Punjab, Haryana, Gujrat, certain branches of Maharashtra, Erode in TN.
I’ve tried to understand and summarize whatever I found interesting. Any and every feedback is appreciated.
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Did they mention about stress due to recent floods and landslides in TN and KL?
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Nothing on that. In fact, management was asked the reason for the elevated delinquencies in microfinance. I’ll add the quote from the concall here.
It’s (microfinance delinquencies) really been moving badly. And what started in some is actually spreading to more pockets now. And this is not really led by some event risk. It’s not a political or it’s not a flagged kind of a natural disaster-related issue. So this is something that is actually fundamental to the industry itself.
Page: 10-11 of the concall.
Also, the landslides are much more recent in nature. So, if there is any effect due to that, it’ll probably come up in the next quarterly results/concall.
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