Digital Adoption And Urbanization In India Will Expand Credit Markets

Key Takeaways

• Cutting back on microfinance and slashing funding costs could boost risk-adjusted returns and drive profit growth ahead of peers.
  
• Digital expansion, new product offerings, and sector-focused deposits position Equitas to capture market share and deliver sustained, above-average growth.
  
• Overdependence on traditional banking, regulatory challenges, high funding costs, asset quality risks, and intensifying competition threaten profitability, growth, and operational efficiency.

Catalysts

Provides various banking products and services to for individuals and corporates, and micro, small, and medium enterprises in India.

• While analyst consensus expects reduced Microfinance exposure to stabilize margins, the bank is targeting an even faster-than-expected wind-down, with Microfinance potentially falling below 5 percent of total loans by FY '27, minimizing credit volatility and turbocharging earnings through improved risk-adjusted returns.
  
• Analyst consensus expects NIM improvement as funding costs decline, but the management's aggressive cost-cutting on deposit rates and accelerating CASA initiatives could see cost of funds fall more quickly than anticipated, delivering an outsized margin rebound and driving profit growth ahead of peer SFBs.
  
• The rapid scaling of digital initiatives, new product launches like credit cards and personal loans (focused on deepening customer wallet share), along with an industry-tailored mobile app, could unlock exponential cross-sell opportunities and boost fee income, supporting double-digit revenue growth.
  
• Equitas' leadership in Merchant, NR, and Elite segment deposits allows it to capture a disproportionate share of the expanding formal credit market, especially as urbanization and MSME demand accelerate, positioning the bank for structurally higher asset and deposit growth versus historical averages.
  
• With consolidation expected to intensify in the small finance bank sector, Equitas' strong capital adequacy and long-term investments in technology and operations position it to take market share from weaker rivals, enhancing long-run profitability and compressing the cost-to-income ratio.

Equitas Small Finance Bank Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Equitas Small Finance Bank compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Equitas Small Finance Bank's revenue will grow by 20.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.5% today to 23.1% in 3 years time.
• The bullish analysts expect earnings to reach ₹17.0 billion (and earnings per share of ₹14.83) by about August 2028, up from ₹1.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, down from 43.8x today. This future PE is lower than the current PE for the IN Banks industry at 12.2x.
• Analysts expect the number of shares outstanding to grow by 1.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.73%, as per the Simply Wall St company report.

Equitas Small Finance Bank Future Earnings Per Share Growth

Risks

• The accelerating pace of digital disruption and rising preference for fintech and digital-first banks could make Equitas SFB's heavy reliance on physical branches and traditional customer acquisition strategies increasingly inefficient, leading to persistently high operating expenses and reduced net margins.
  
• Intense regulatory scrutiny and implementation of evolving compliance and guardrails, especially in the Microfinance segment, elevate operational complexity and increase compliance costs, which can further erode net earnings and strain profitability.
  
• The bank's limited growth and decreasing proportion of low-cost current and savings account (CASA) deposits signal an ongoing structural challenge, making its cost of funds higher relative to larger or more digitally agile peers and weighing on net interest margins over the long term.
  
• Vulnerability in asset quality remains high, evidenced by a sharp increase in credit costs within the microfinance portfolio (rising from 2.3 percent to 11.37 percent), slow progress in improving the SMA pool outside microfinance, and rising GNPA in key segments such as small business loans, which together could suppress both future revenue growth and bottom-line earnings.
  
• As financial inclusion opportunities become saturated and competition from universal and neo-banks intensifies, Equitas SFB's ability to consistently grow its loan book may stall, while higher interest rate volatility and challenges in shifting its asset mix may prevent sustainable improvement in return on assets and long-term profit growth.

Valuation

• The assumed bullish price target for Equitas Small Finance Bank is ₹97.39, which represents two standard deviations above the consensus price target of ₹74.56. This valuation is based on what can be assumed as the expectations of Equitas Small Finance Bank's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹98.0, and the most bearish reporting a price target of just ₹60.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ₹73.5 billion, earnings will come to ₹17.0 billion, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 12.7%.
• Given the current share price of ₹56.49, the bullish analyst price target of ₹97.39 is 42.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.