Brokerage firm Emkay Global remains constructive on Equitas Small Finance Bank, maintaining its positive stance on the stock, backed by expectations of sustained loan growth and improving profitability metrics. The brokerage has retained its ‘Add’ rating on the stock with a target price of Rs 75, valuing the lender at 1.2 times its estimated FY28 adjusted book value.
The optimism follows the bank’s first-ever analyst meet, where the management laid out its business strategy and medium-term roadmap. Emkay highlighted that credit growth momentum is likely to remain strong, with the bank guiding for expansion of more than 20 per cent.
Created with AI. Errors are possible“The bank expects credit growth momentum to sustain at >20%, with its asset mix largely tilted toward secured lending while maintaining MFI exposure at ~10%,” the brokerage said, underlining the improving stability in the loan book.
Management indicated that after a phase of elevated stress, the MFI portfolio is stabilising. “Asset quality remains under control as MFI stress is largely behind,” Emkay noted, although it flagged that the bank remains cautious about external risks, particularly the ongoing West Asia conflict and its possible impact on certain segments like commercial vehicle loans.
The brokerage also pointed out that Equitas has deliberately reduced its MFI exposure to around 10% of advances and intends to maintain it at similar levels going forward. At the same time, the lender is looking to expand its presence in the mass formal segment as its cost of funds continues to moderate.
Growth in assets under management (AUM) has already shown signs of acceleration, rising 21% in FY26. “The management expects to sustain AUM growth at >20% in FY27,” the note said.
However, challenges remain on the liabilities side. Deposit mobilisation continues to be a constraint for small finance banks, with Equitas reporting deposit growth of just 8% year-on-year in FY26. This has resulted in a higher reliance on borrowings to support its credit expansion.
Despite this, the bank has taken steps to strengthen its liability franchise. Retail deposits now account for about 68 per cent of total deposits, while nearly 88 per cent of bulk term deposits are non-callable, providing better stability. Additionally, its newly launched FCNR deposit business has crossed USD 29 million, indicating early traction.
The cost of funds has shown a marked improvement. “Landed cost of funds declined sharply from 12.7 per cent in FY25 to 8.2 per cent in FY26,” the brokerage noted, adding that the bank is targeting further moderation over the next three to five years. Equitas also plans a calibrated branch expansion strategy, adding 10–15 branches annually with a focus on resource mobilisation.
Margins, however, are expected to remain range-bound. The bank is guiding for net interest margins of around 7 per cent, as rising funding costs offset some of the benefits from portfolio mix changes.
Even so, Emkay believes profitability will improve gradually, driven by operating leverage and lower credit costs. “Steady improvement in operating leverage and credit costs (1.2–1.3 per cent) should increase RoA to 1.2–1.25 per cent in FY27, with an exit quarterly RoA of 1.5 per cent,” it said.
Asset quality trends have also improved meaningfully. Gross slippages have come down to 3.8 per cent of loans from 7–8 per cent levels seen a year ago. As a result, the gross non-performing asset (GNPA) ratio has declined to 2.6%, comfortably below the 3 per cent threshold that is often seen as a key benchmark.
This improvement has broader strategic implications. Emkay believes that “the bank’s diversified loan portfolio, along with the GNPA ratio being below 3 per cent, should make it eligible to apply for a Universal Bank License,” a move that could act as a key catalyst for re-rating the stock.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
