CAPITALSFB - Capital Small Finance Bank Ltd Share Price

During the earnings conference call for the financial year ended March 31, 2025, management provided an optimistic outlook for Capital Small Finance Bank. They highlighted an expected support for India's GDP growth in FY26, with a forecast of 6.4% based on factors such as improved rural spending, revival of consumer demand, and favorable agricultural conditions due to anticipated above-average monsoon rains.

In terms of financial performance, the bank recorded an 18% growth in profit after tax (PAT), reaching INR 132 crores for the full year. They reported an impressive 17% year-on-year growth in their loan portfolio, totaling INR 7,184 crores. The management emphasized their strong asset quality with gross NPAs reduced to 2.58% from 2.76% the previous year and net NPAs down to 1.3% from 1.4%. The bank maintained a capital adequacy ratio of 25.4% and an impressive liquidity coverage ratio (LCR) of 235.1%.

Looking ahead, the bank is targeting a loan growth rate of over 20%. The management acknowledged the challenges posed by low deposit growth, aiming for improvements through a calibrated strategy, with a goal of increasing the credit-to-deposit ratio from 81.4% in FY25 to the mid to high 80s in the medium term. They also plan to enhance their non-interest income, aiming to push it beyond 1% of total assets.

Key forward-looking points include:

• Expansion into new states and an increase in branch networks by 20 to 25 in FY26.
• Continued focus on secured lending to the middle-income segment.
• Expectation to maintain a net interest margin (NIM) around 4.2%.
• Commitment to reducing net NPAs below 1% in line with their strategy for acquiring a universal banking license.

Overall, the management expressed confidence in their growth trajectory, backed by improvements in economic conditions and internal financial metrics.

Questions and Answers from the Q&A Section of the Earnings Transcript

Question: Sir, first question is about your FY '26 as well as medium-term guidance on ROA and ROE. How do we intend to increase this ROA and ROE going forward?

Answer: We aim to bring our CD ratio to the mid to high 80s from the current 81.4%. For every 1% increase, we estimate a 4 basis points boost to the NIM, which will ultimately enhance our ROTA. Additionally, we're focused on boosting non-interest income, which we expect to grow beyond the current 0.9%. While we are in a growth phase with limited opex reduction options, we believe these measures will support the ROA and ROE growth we're targeting.

Question: What is the strategy to achieve a 13% deposit growth when the current growth is significantly lower?

Answer: We're focusing on improving our CD ratio first, as it's crucial for supporting business growth. 92.5% of our deposits being retail, we are aiming for faster deposit growth while cautiously managing asset quality. Although our deposit growth has been 11%, we anticipate a higher rate moving forward, in line with our 20% growth target for the loan book this fiscal year.

Question: Given your SMA is high at 5-6%, how do you see the credit costs going forward?

Answer: Our credit cost remains low, around 0.12% for FY '25. While SMA is a concern, many are within a manageable range, and we've had negligible write-offs. We aim to maintain credit costs in a tight range of 0.1% to 0.2%. Our focus on solid collection efforts will help us keep these ratios in check as we move ahead.

Question: Can you elaborate on the impact of rate cuts on NIM and the floating vs. fixed rate assets ratio?

Answer: Currently, 54.77% of our portfolio is floating rate, and we expect to maintain our NIM at around 4.2%. We have already cut the savings rate by 15 bps to help retain the NIM despite anticipated rate cuts. Our floating book, primarily MCLR-linked, will be repriced as rates adjust, and we believe we can maintain NIM within the current range.

Question: What are your future strategies regarding asset mix and deposit growth?

Answer: We're targeting growth in MSME and mortgage sectors while maintaining a stable agriculture loan portfolio. Future efforts will focus on improving MSME concentration from the current 21%. Additionally, we plan to expand deposit growth and will introduce 20-25 new branches to facilitate that across various states, leading towards a more diversified banking presence.

Question: What is the expected trajectory for your gross and net NPAs?

Answer: We're currently at 2.58% gross NPA and 1.3% net NPA, with a target to reduce our net NPAs below 1% to meet universal banking criteria. We believe this is achievable through enhanced recovery efforts and managed slippage ratios while riding on favorable market conditions.

These insights help present a comprehensive understanding of Capital Small Finance Bank's strategies and expectations for growth, asset quality, and profitability going forward, as outlined in the recent earnings call.