Equitas Small Finance Bank Limited Bank loan rating withdrawn; debt instruments reaffirmed
Rating Action
1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the debt instruments of Equitas Small Finance Bank Limited (Equitas SFB).
CRISIL Ratings has also withdrawn its ratings on Rs 600 crore bank loan facilities at the request of the entity and on receipt of a ‘no-due certificate’ from the bankers. The withdrawal is in line with CRISIL Ratings’ policy on withdrawal of ratings.
The ratings factor in the bank’s diversified product portfolio with increasing focus on secured lending, the adequacy of its capitalization in relation to the scale, sustained ramp up in its deposit franchise and experienced management team with strong focus on process orientation. These strengths are partially offset by a modest credit risk profile of the borrower segment, average profitability and moderate geographical concentration in business.
Following the second pandemic wave and a gradual revival thereafter, nine monthly growth in AUM was 9.1% (non-annualized). Correspondingly, the collection efficiency of the bank – which had reached 108.5% in March 2021 – declined to 78% in May 2021 owing to imposition of lockdown after the second wave. Eventually, as these restrictions were uplifted – collections also started to restore. Efficiency for the month of December 2021 was 99.7%.
On December 31, 2021, the bank had a GNPA of 4.39% and NNPA was 2.38% as compared to peak GNPAs (excluding write offs) of 4.64% and 2.37%, respectively, reported on September 30, 2021. As at the close of Q3 2022, the bank's PCR stood at 47%. Total stressed assets (including GNPAs, restructured assets and nine monthly write offs) constituted about 14.5% of the AUM as on December 31, 2021.
The bank made Rs 746 crore of cumulative provisioning over fiscal 2021 and 9M 2022 and written off another Rs 413 crore during the period. Resultantly, credit costs for fiscal 2021 were 1.6% whereas for nine months ended December 2021 – it was 1.9% (annualized). RoMA for fiscal 2021 was 1.7% whereas for 9M 2022 was 0.9%.
On the liability side, the bank’s deposit base has grown by 12.3% (annualized) over nine months ended December 31, 2021 – driven by an increasing base of retail term deposits and CASA. In the total deposit base of Rs 17,884 crore as on December 31, 2021, the share of retail deposits (including CASA) was 90% as compared to 60% a year ago. The bank’s CASA, as a proportion of total deposits – has increased substantially to 50.8% as compared to 25.0% over 12 months through December 2021. On this metric, Equitas SFB is now comparable with universal banks however, its ability to sustain the share of CASA and retail deposits at current levels while being able to reduce the cost of funds, remains to be seen. |
Analytical Approach To arrive at the ratings, the team has looked at the standalone credit risk profile of Equitas Small Finance Bank, referred to herein as Equitas SFB. |
Key Rating Drivers & Detailed Description Strengths:
Equitas SFB is the second largest small finance bank in the country and has presence in product segments such as SBL (45%), vehicle loans (25%), and microfinance loans (19%) - which the bank intends to bring down gradually to sub 15%. Other segments like MSE Finance and loans to NBFCs (corporate loans) have grown in the last few quarters and accounted for 6% and 4% of AUM as on December 31, 2021, respectively. The bank has been able to diversify its portfolio reaping the benefits of its legacy book across retail asset segments. After transforming into a bank, it has expanded focus from core segments such as microfinance and vehicle finance to small business loans, MSE, corporate lending, housing finance and others. The diversity in asset mix has helped the bank in curtailing the influence of disturbance in any one segment, on the overall asset quality of the bank.
Overall AUM grew at 13% (annualized) over nine months ended December 31, 2021. This was a result of improvement in market demand in Q2 and Q3 2022 after the muteness on account of the second pandemic wave and allied challenges. Among segments, Small Business and home Loans grew at 19%, vehicle loan segment at another 13%, and another 21% growth was witnessed in the MSE Finance portfolio. Microfinance business grew at a muted rate of 6% on a year-on-year basis. Other smaller segments like gold and unsecured loans, declined by 4% y-o-y which has resulted in its share in the AUM remaining relatively small.
Apart from diversity, the secured portfolio has also been contributing to the overall growth of advances (including IBPC).
The bank's capital position remains adequate for its scale and nature of operations, as indicated by reported networth of Rs 3583 crore on December 31, 2021. Since its transformation into a bank in September 2016, Equitas SFB has maintained CAR over 20%. As on December 31, 2021, the tier I and overall CAR stood at 20.7% and 21.9%, respectively. To comply with the regulatory requirement of 25% public shareholding, the bank has further raised Rs 550 crore through Qualified Institutional Placement (QIP) on February 19, 2022. Post this round of capital issue, the tier I CAR of the bank is estimated to have increased by around 200-250 bps. Gearing remained moderate at 5.8 times on December 31, 2021, and following the QIP in February 2022, this metric is expected to reduce from current levels.
Being the first among SFBs to transform into a bank, Equitas SFB had the first mover advantage in context of deposit mobilisation. After conversion to a bank in September 2016, Equitas SFB started to mobilize deposits.
Over the nine months ended December 31, 2021, its deposit base has grown at 12.3% (annualised) to reach Rs 17,884 crore, which accounts for 87% of its total external liabilities. This growth was driven by traction in the bank’s retail deposit base (retail term deposits and CASA of ticket size <Rs 2 crore) which grew from 52% to 80% over this period. CASA, after remaining within 30% for most of Equitas SFB’s banking history, has sharply increased over the last 4-6 quarters to reach 50% as on December 31, 2021 which is higher than most banking peers. As on December 31, 2021, the aggregate share of retail deposits and CASA was 90% which is highest among SFBs and comparable with most universal banks. This robust traction in retail deposits was a factor of some of the initiatives the bank had implemented in the previous fiscal. Equitas SFB had launched the 3-in-1 deposit account, a deposit product exclusive for women and a customised product for NRIs, all of which have propelled customer acquisition.
Another stimulus to CASA has been the rate which Equitas SFB has been offering for savings accounts and retail term deposits. For Q3 2022, the deposit cost for savings accounts was 6.2% and for retail term deposits was 6.9%. This rate, though lower than the preceding quarters, remains higher than that charged by banking peers. Blended cost of funds for Q3 2022 was 6.5% as compared to 7.3% for the corresponding quarter of previous fiscal.
As Equitas SFB transformed into a bank, its senior management team was strengthened to enhance smooth ramp-up of banking operations. Eminent professionals from different fields of the financial sector have been brought on board. Along with Mr P N Vasudevan, the founder of Equitas and MD & CEO of Equitas SFB, many other members of the senior management team have been with the bank for many years. There is also a strong second line of management.
Equitas has been a highly process driven entity having robust systems and processes with strong technical backing ever since the commencement of microfinance operations. This attribute has helped scale up the business fast and to replicate similar models with modifications for vehicle and other portfolios.
Weaknesses:
Despite segmental diversification in portfolio and increased focus on secured lending, the bank’s customer base has not changed materially. The borrower base still comprises people living in rural and semi-urban areas, carrying out small business operations or doing petty jobs which may be associated with irregular cash flows. Most of the borrowers witnessed cash flow pressure after the lockdown to contain the pandemic, which has hindered their repayment capability.
In the aftermath of the pandemic, the bank’s pro-forma GNPAs surged to and peaked at 4.6% on September 30, 2021, vis-à-vis GNPAs of sub 3% reported for pre-Covid period. On December 31, 2021, the bank had a GNPA of 4.4% and NNPA was 2.4%. The bank's PCR stood at 47% as on December 31, 2021 as compared 50%, a quarter ago.
As on September 30, 2021, the bank had a restructured portfolio of Rs 1,832 crore, most of which was restructured under the second scheme. This formed 10% of the AUM as on that date. Total stressed assets (inclusive of GNPA, restructured portfolio and write offs over the nine months ended December 31, 2021) constituted approximately 14% of the overall AUM as on December 31, 2021. Over Q3 2022, regular billing for the restructured book has commenced and the collection efficiency of this pool is close to 60%.
As a bank, Equitas has been lowering its exposure to the microfinance segment in order to limit the volatility in asset quality. Historically, microfinance portfolio has been susceptible to regional, social and political issues and given the high degree of vulnerability for microfinance segment, the bank intends to cap its exposure to the segment at 15% and replace what’s remaining of it by secured loans. In terms of geographical diversity, 55% of Equitas SFB’s portfolio is housed in Tamil Nadu which makes the book susceptible to local socio-political issues and this, in CRISIL Ratings’ opinion, remains a challenge for the bank.
Despite marginal elevation in credit costs to 1.6% for fiscal 2021 from 1.3% for fiscal 2020, the bank reported a RoA of 1.7% for the fiscal as compared to 1.4% for the previous year. The impact of elevated credit costs was offset by higher treasury income and low operating expenses for the year. For 9M 2022, the bank reported a net profit of Rs 161 crore which translates to an annualized RoA of 0.9%. Elevated credit costs, marginally higher operating expenses and compression in NIMs on account of interest reversals, were the key reasons behind lower RoA for the period.
As the bank scales its secured portfolio, yields may decline marginally with some of its impact being offset by a corresponding decline in cost of funds. CRISIL Ratings believes this may result in compression of interest margins. In such a scenario, the bank’s ability to diversify streams of income and optimize operating expenses (which are still relatively high), remains a key monitorable. Additionally, the bank has already provided for Rs 800 crore as pandemic imposed credit costs and is expected to end the year with 1.5 – 2.0% credit costs. However, any further provisioning requirements would impose pressure on the profitability margins and may be a rating sensitivity factor. |
Liquidity: Strong The bank had an excess SLR of Rs 1977 crore and a Liquidity Coverage Ratio (LCR) of 125% on December 31, 2021. The bank’s liquidity profile is also supported by its on-tap access to avail refinance limits from FIs. As on December 31, 2021, the bank did not have any exposure to CDs.. Incrementally, Equitas SFB’s liquidity position will remain supported by its scheduled commercial bank status which allows it access to systemic liquidity of RBI. |
Outlook: Stable The liability profile of Equitas SFB would continue to evolve by way of shift to deposits from wholesale borrowings and more particularly the increasing share of granular and stable retail deposits. The bank is expected to maintain momentum in loan book growth observed in the past few quarters along with gradual diversification of product mix. As greater scale is achieved, the bank’s capitalisation is also expected to remain at adequate levels. However, the ability to profitably scale across newer segments would remain a key monitorable. |
Rating Sensitivity factors Upward factors
Downward factors
|
About the Bank Equitas Holdings Ltd – the holding entity of Equitas SFB - started operations in 2007 in the microfinance segment. It diversified into vehicle and housing finance in 2011, and entered SME loans and loans against property (LAP) in 2013. The company received in-principle approval in September 2015 to transform into an SFB. It obtained a scheduled commercial bank license in September 2016 and commenced banking operations under Equitas SFB.scheduled commercial bank license in September 2016 and commenced its banking operations. |
Key Financial Indicators (Standalone)
^pro-forma |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
|
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||
|
Criteria Details
|