Equitas Small Finance Bank - Focus on building stable, scalable bank with prudent and conservative approach - ICICI Securities

Key takeaways from Equitas SFB's FY21 annual report: 1) Increased focus on enriching customer lifecycle (created CX vertical & business intelligence unit in FY21), 2) building best-in-class digital capabilities, 3) strengthening market positioning in new products like new CV & used car loan etc., and 4) encouraging achievements in six strategic focus areas conceptualised by the management team to build stable, scalable and sustainable bank. Further, its expertise in providing credit to unbanked and underbanked micro & small entrepreneurs reflects in it closing FY21 with highest RoA (since commencement of SFB operations) at 1.7%. It delivered RoE of 12.5% by containing credit cost at 2.26% despite offering moratorium to 98% customers during 1st phase. Drop in collections in April/May'21 amid resurgence of covid cases poses near-term asset quality risk. However, resiliency showed by customers during 1st wave, provision buffer at 90bps and calibrated lending (MFI book fell 11% YoY in FY21) reinforce our view that Equitas would navigate the current cycle more effectively than peers. Maintain BUY. Key risk - A) Stress unfolding higher than anticipated and B) deceleration in loan growth.

- FY21 financial performance reflects business resiliency. Sudden outbreak of covid in early FY21, raised lot of questions about the asset quality outlook for players having higher exposure to self-employed segment like Equitas. However, the way it navigated covid cycle with FY21 RoA at 1.7% & credit cost at 2.26% speaks for business resiliency and expertise in small-ticking lending to self-employed segment. Taking cognisance of its resilient performance in one of the most challenging years backed by its extremely prudent and conservative approach in the way it does business, it will remain committed, more than ever, to being a catalyst in increasing formalisation of financial services.

- Liabilities leapfrogged in terms of granularisation; increasing focus on cross-sell. Despite covid-related challenges during H1FY21, it recorded 300% YoY jump in new account opening to 0.476mn from 0.159mn in FY20, largely backed by its 'digital first' initiatives and improved productivity. As a result, CASA ratio reached 34%, one of the highest within SFB space and share of retail TD increased to 80%. Notably, with huge customer base of ~3.9mn as on March'21 and its commitment to "customer first" approach, it created a separate "customer experience (CX)" vertical in FY21 for a much granular focus on enriching customer journeys with Equitas. CX engine runs on three wheels - i) operations for managing customer touchpoints, ii) measurement for collecting, analysing customer feedback & implementing recommendations, and iii) delivery by leveraging digitisation & AI-based automation.

- Increased thrust on building robust digital and data analytics capabilities. In-line with its 'digital first' approach, it adopted a collaborative approach to leverage the best available technologies to improve & enhance banking experience. As part of this strategy and on account of the pandemic, it launched several initiatives such as video-KYC based account opening, partnered with fintechs to enable presence-less account opening, revamped digital channels to extend a comprehensive suite of banking services and launching Bot banking integrated with IVR. It has also developed a Business Intelligence Unit (BIU) to leverage data analytics in driving superior management reporting, cross-selling, customer engagement and internal control systems.

Source : Equity Bulls

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