By Jindal Haria

India Ratings and Research (Ind-Ra) has affirmed Equitas Small Finance Bank Limited’s (Equitas) Long-Term Issuer Rating at ‘IND A+’. The Outlook is Stable. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Bank loans

-

-

-

INR865 (reduced from 11,000)

IND A+/Stable

Affirmed

Non-convertible debentures (NCDs)

-

-

-

INR3,000 (reduced from 5,200)

IND A+/Stable

Affirmed

Commercial paper

-

-

-

INR250

WD

Withdrawn (repaid in full)

Subordinated debt

-

-

-

INR400

IND A+/Stable

Affirmed

KEY RATING DRIVERS

Moderate Leverage Policy: The bank’s Tier 1 capital ratio in 1HFY18 was about 31.62% with a total net worth of about INR20.39 billion as against other private banks in the ‘IND A+’ category with Tier 1 ratio of 9.8%-25% and equity of INR20 billion-40 billion. Equitas’ total capital adequacy ratio of 34.30% provides it with substantial ability to leverage its capital. The bank also plans to maintain its leverage at around 6x under existing asset mix, thus providing it with the ability to maintain sufficient capital buffers and adequate protection against deterioration in its loan portfolio in Ind-Ra’s stress tests.

 

New Business Lines to Focus on Secured and Mainstream Loan Assets: As a strategy, Equitas has reduced the share of microfinance in its loans under management (LUM) to 42% in 1QFY18 (1QFY17: 52%). The bank plans to maintain the share of microfinance at 25% of its LUM. The commercial vehicle vertical and the inclusive banking vertical (including microfinance, microloan against property, small ticket housing in addition to some new products such as business and agri loans) are businesses that existed in the non-bank finance company form as well.

 

The bank has created a new business loan vertical that will offer working capital loans in addition to secured and unsecured business loans of up to INR7.5 million. Ind-Ra expects the bank’s focus on introducing mainstream banking products for the mid-small sized businesses along with the reduction in the share of microfinance to increase the share of secured loan products. However, Equitas’ ability to compete in new segments and manage portfolio quality where other banks could already be present needs to be established.

 

Liability Profile Encouraging in Banking Form: The bank mobilised INR30 billion of deposits (32% of liabilities) by 1HFY18 and current and saving account deposits of 26% on its modest deposit base. However, Equitas’ ability to mobilise deposits (including granular retail deposits) in a sustained manner with a growing loan book remains to be seen. Equitas has set up about 392 liability branches by 1HFY18; the capability of the branch network in garnering retail deposits (fixed and savings) will be tested in the medium term. 

 

Adequate Liquidity: The bank’s asset funding gap (short-term assets less short-term liabilities as a percentage of total assets) turned negative to 15% of total assets in FY17 and matched in 1QFY18 from a surplus position in FY16. Excess statutory reserves and cash on balance sheet are adequate to cover the gap. The bank also has access to lines from refinancing agencies, call money markets, certificates of deposit and the Reserve Bank of India as a lender of last resort. However, as asset tenors increase given the expected product mix, the asset funding gap will be a key monitorable. Ind-Ra believes that banks with higher gaps (30%-45%) face refinancing pressure and their liability costs may be sticky and on the higher side. 

Operating Metrics Could Remain Under Pressure:
On the flip side of the changing loan mix, the bank’s yields are expected to decline and could impact the profitability margins. Ind-Ra expects Equitas to achieve return on average assets of 2%-2.5% over the medium term. Although profit after tax declined marginally to INR1.04 billion in FY17 (FY16: INR1.67 billion, 1HFY18: INR268 million), Ind-Ra expects the bank’s profitability to be under pressure primarily due to provisioning (FY17: INR1,029 million, 1HFY18: INR712 million) on the microfinance portfolio and the expected decline in yields if not supported by a proportional decline in funding costs. Ind-Ra expects a modest recovery from the microfinance portfolio; therefore, there may not be significant write-backs. The bank’s loan against property and housing businesses is under stress; Ind-Ra expects this to continue for a couple of years. Further, the bank’s operating expenditure peaked in 1HFY18 with the opening of most of the liability branches and new loan verticals.
 


RATING SENSITIVITIES

Positive: A sustained increase in operating scale, portfolio size, franchise and share of secured loans without significant deterioration in asset quality, along with successful execution of small finance bank operations, ability to raise longer tenor debt and deposits (particularly low-cost retail deposits) while maintaining adequate short-term liquidity and robust capital buffers, which in Ind-Ra’s opinion increases Equitas’ tolerance for asset quality deterioration, could lead to a positive rating action.

Negative:
An unsustained increase in non-performing assets, failure to mobilise sufficient deposits, capitalisation falling below or close to minimum regulatory requirements, consistently high asset funding gaps that in the agency’s opinion could increase refinance pressure, or deterioration of leverage relative to the product mix, could lead to a negative rating action.


COMPANY PROFILE

Equitas is a Chennai-based small finance bank. As of September 2017, it had 392 liability branches and 616 asset centres with total LUM of about INR73.26 billion.


FINANCIAL SUMMARY 

Particulars

FY17

Total assets (INR million)

92,017.1

Total equity (INR million)

19,682.3

Net income (INR million)

1,041.4

Return on average assets (%)

1.3

Tier 1 capital (%)

32.3

Source: Annual Report

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

25 August 2016*

28 August 2015*

30 March 2015*

Issuer rating

Long-term

-

IND A+/Stable

IND A+/Stable

IND A-/Stable

IND A-/Stable

Bank loans

Long-term

INR865

IND A+/Stable

IND A+/Stable

IND A-/Stable

IND A-/Stable

NCDs

Long-term

INR3,000

IND A+/Stable

IND A+/Stable

IND A-/Stable

IND A-/Stable

Commercial paper

Short-term

INR250

WD

IND A1+

IND A1

IND A2+

Subordinated debt

Long-term

INR400

IND A+/Stable

IND A+/Stable

IND A-/Stable

IND A-/Stable

* Ratings are for Equitas Finance Ltd

ANNEXURE

Instrument Type

ISIN

Date of  Issuance

Coupon Rate (%)

Maturity Date

Rated Amount (million)

Rating/Outlook

NCDs

INE063P07130

28 July 2015

11.66

28 July  2020

INR750

IND A+/Stable

NCDs

INE063P07148

14 August 2015

11.66

14 August  2020

INR750

IND A+/Stable

NCDs

INE063P08062

29 August 2016

10.15

29 August 2019

INR1,500

IND A+/Stable

Subordinated debt

INE063P08013

30 March 2015

14.95

30 April 2021

INR400

IND A+/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.
 

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

Headquartered in Mumbai, Ind-Ra has six branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad and Kolkata. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Analyst Names

  • Primary Analyst

    Jindal Haria

    Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121