Emerging Lenders Day - Conference Takeaways - YES Securities

We hosted a one-day conference of mid-sized specialized lenders (SFBs, MFIs, Emerging Banks, niche HFCs, etc.) with strong growth potential to seek insights on their concurrent growth and asset quality trends, long-term strategy and outcomes, and nuances in their mainstay lending segments. Collective takeaways are summarized below, and company-wise takeaways and our stock view (for coverage cos.) is in the individual section inside the report.

SFBs (AU and Equitas) - Asset quality in control and Growth is back

The management of both AU SFB and Equitas SFB were reasonably confident of delivering an improvement in proforma Gross NPLs during Q4 FY21. Collections, in larger measure, has moved back to the pre-Covid level; stemming creation of new stress and roll forward in overdue buckets. Rather, rollback and resolutions have started to pick-up from the current quarter. This read with lower-than-expected Covid stress manifestation in Q3 FY21 (proforma slippages + restructuring < 4% of AUM) highlights resilience of these SFB's underwriting in their mainstay business segments of vehicle finance and small business loans. With both the banks having conservatively provided for the stress, credit cost normalization should ensue soon. AU SFB was more bullish on its growth outlook (had surprised on portfolio growth in Q3 too), while Equitas SFB would be driving new business activity from Q1 FY22. Granular deposits (CASA + RTD) accretion remains strong and is largely strategic in nature. Both banks are expecting a material improvement in core cost metrics over the coming 24 months. We remain positive on AU SFB and Equitas SFB, and have significantly raised price targets.

MFIs (CREDAG and Spandana) - Cycle-completing provisions done

The two largest listed MFIs shared that collection efficiency (incl. arrears) has incrementally improved post December, supported by part-paying customers becoming full-paying and collection of overdues from customers and in locations which were lagging (like Maharashtra). However, there was negligible activation among the non-paying customers. With collection situation panning out in-line with expectations and having substantially augmented ECL cover in Q3 FY21, the managements of both NBFC-MFIs were confident of a much lower credit cost in Q4 FY21. Disbursement activity is sustaining above the pre-Covid level; however, NGF (new customers addition) remains calibrated with the need to sustain collection rigor in the near-term (particularly in branches where CE is <90%). Liquidity availability is normalizing, but the cost remains sticky for Spandana. Both MFIs are hopeful about delivering a strong growth and profitability in FY22, even as they believe that usual credit cost will move up due to change in borrower behavior caused by the six-month moratorium. Based on our belief that profitability recovery will be encouraging from Q4 FY21 itself, we remain positive on CREDAG and Spandana and see significant upside in the next 12 months.

CSB Bank - Focus on building the retail franchise

CSB Bank is focused on building a strong customer franchise and on securing primary wallet share of the customer. Liability customer acquisition machinery has been developed along with leadership augmentation. The bank will be building propositions around NRI business, and will soon launch its salary accounts business. Its wants to have SME-focused branches and is looking at Fintech partnerships to source good quality customers. In the recent past, the bank has hired a new CTO, Heads for Retail Banking & Branch Banking and Retail Risk and a Chief Credit Officer. These senior employees have come from large private banks and have strong pedigree. Over the next 18 months, gold loans will remain an important growth area; however, other retail products like MSME, 2w, Agri & MFI, and LAP will grow faster. The period between 18-42 months from now would witness significant shift in portfolio mix away from gold loans, with the bank keen on funding larger SMEs and Corporates after gaining some scale. Current NIM at 5%+ is not sustainable, and the internal target band is 4-5%.

Source : Equity Bulls

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