Whalesbook
Brokerage Emkay Global has kept an 'Add' rating on Equitas Small Finance Bank with a price target of Rs 75. The positive outlook is based on the bank's goal to grow loans by over 20% and a strategy shift toward secured lending. While profitability and asset quality are showing improvement, the bank's ability to grow deposits at the same pace as its loans remains a key area for investors to watch.
What Happened
Brokerage firm Emkay Global recently shared its outlook on Equitas Small Finance Bank, maintaining an 'Add' rating with a price target of Rs 75. This report follows the bank's first-ever analyst meet, where management detailed their medium-term business strategy. The brokerage highlights the bank's focus on high loan growth and a change in its business mix as primary drivers for this view.
The Shift to Secured Lending
Equitas Small Finance Bank is moving away from its traditional reliance on microfinance loans. According to the report, the bank aims to keep its exposure to the Microfinance Institution (MFI) segment limited to approximately 10% of its total loan book. In its place, the bank is expanding its secured lending portfolio, which now makes up roughly 88% of its total loans. For investors, this is a significant shift, as secured loans (loans backed by collateral like property or gold) are generally considered lower risk than the unsecured MFI loans that were common in the sector earlier.
The Growth vs. Deposit Challenge
While the brokerage projects loan growth of over 20% for the coming year, there is a clear challenge the bank faces: deposit collection. The bank reported an 8% growth in deposits for FY26, which is lower than the pace at which it plans to lend. To manage this gap, the bank has had to rely more on borrowings. The management is now focused on adding 10 to 15 branches annually to help gather more retail deposits, which are considered a more stable and cheaper source of funding than wholesale borrowings.
Improving Profitability and Asset Quality
Emkay Global noted improvements in the bank's financial health. The cost of funds has declined from 12.7% in FY25 to 8.2% in FY26. Additionally, the asset quality—measured by the percentage of bad loans, or Gross Non-Performing Assets (GNPA)—has improved to 2.6%. This is a notable decline from previous levels of 7-8%. The report also highlighted that as the bank manages its costs and improves operating efficiency, it expects to see a gradual rise in its Return on Assets, a key metric used to determine how effectively a bank uses its money to generate profit.
Potential for Universal Banking
The brokerage suggested that if the bank maintains its current performance and diversified loan mix, it may be eligible to apply for a Universal Bank License. This is a significant milestone, as it would allow the bank to operate as a full-service commercial bank. While this is not a confirmed event, Emkay views it as a potential catalyst that could change the market's perception of the stock.
What Investors Should Track
Investors may monitor the bank's ability to balance its deposit growth with its ambitious loan growth targets. A mismatch where loans grow much faster than deposits could put pressure on the bank's liquidity or margins in the future. Additionally, the bank has noted that geopolitical tensions, specifically in West Asia, could impact certain segments like commercial vehicle loans. Keeping an eye on how these external factors affect the bank’s asset quality, alongside progress on branch expansion and cost of funding, will be important for tracking the bank’s performance in the coming quarters.