ESAFSFB - ESAF Small Finance Bank Ltd Share Price

Management at ESAF Small Finance Bank provided an optimistic outlook for the future, focusing on several key initiatives and macroeconomic factors that are expected to drive growth. Notable forward-looking points include:

1. Growth Strategy:

   • The bank plans to continue increasing its share of secured assets in the loan portfolio, targeting 70% by March 2027. Currently, secured assets account for 54.79% of the total loan book, a significant increase from 32.69% a year ago.

2. Financial Metrics:

   • The bank reported total business of INR 42,507 crores as of June 30, 2025, reflecting a Year-on-Year growth of 4.82%. When adjusted for technical write-offs and NPA sales, the underlying growth stands at 8.74%.

3. Market Positioning:

   • ESAF SFB is well-positioned to benefit from India's macroeconomic momentum, characterized by structural reforms and rising formal employment, driving financial inclusion into historically underserved segments.

4. Capital Position:

   • The bank raised Tier 2 bonds amounting to INR 65 crores to strengthen its Capital to Risk-Weighted Assets Ratio (CRAR), indicating a proactive stance on capital adequacy.

5. Banking Sector Developments:

   • The macroeconomic environment, including RBI's repo rate holding steady at 5.50%, suggests a conducive backdrop for growth, bolstered by estimated GDP growth of 6.5% and a moderated inflation projection of 3.1% for FY '25 -'26.

6. Provisions and Risk Management:

   • ESAF SFB's approach includes an improved provision coverage ratio of 73.2%, with a targeted gradual decrease in gross NPA from a current level of 7.5%.

7. Digital Innovations:

   • The bank plans to leverage digital banking capabilities for expanding its customer base, improve operational efficiencies, and enhance overall deposit quality.

Overall, management emphasizes balanced growth while ensuring risk management, aiming to restore operating metrics and profitability through a disciplined approach in an evolving economic landscape.

Q&A Section Summary from the Earnings Transcript

1. Question: From micro loans...how do you expect microfinance origination to normalize or stay moderated, and what underwriting changes have been made for micro assets?

Answer: We have implemented strict guardrails for microfinance lending, such as a maximum of INR 200,000 per borrower and limiting outstanding loans to three. Our collections from direct management show around 98% success. While some stress exists in BC-managed portfolios, notably in Karnataka, we've started directly intervening to improve quality and are seeing positive results.

2. Question: Could you also break down recent disbursements by product and ticket size, especially the share of small-ticket gold versus large secured loans, and how is pricing differentiated?

Answer: About 25% of our loans are small-ticket gold loans, primarily around INR 100,000 to INR 125,000. Only 10% of these loans are provided to the microfinance segment, which helps manage risk effectively.

3. Question: What portion of recent slippage was related to legacy vintage versus new vintage, and which products are driving this incremental slippage?

Answer: Most slippages originate from our micro banking book, with Karnataka and Tamil Nadu contributing nearly 50%. However, SMA levels are moderating, giving us confidence that slippages will decline moving forward.

4. Question: How are you trying to de-risk or diversify across various geographies?

Answer: Asset concentration in Kerala is reducing, now at 35%. We're expanding in 25 states outside Kerala, focusing on growing our customer base, particularly in NRIs and urban markets, to further diversify.

5. Question: What are the contributors to margin compression and which levers are prioritizing to restore this margin?

Answer: NIM has been affected by transitioning from unsecured to secured loans and holding excess liquidity of INR 2,000 crores. Repricing strategies for loans and deposits are underway, but complete impact will take 1-1.5 years to fully realize.

6. Question: What is your comfortable PCR target for FY '26 and the expected provision cadence if slippage remains at Q1 run rate?

Answer: We aim to maintain a PCR around 70%, as prescribed by RBI, while continuing to provide above minimum required levels across all NPA buckets for balance sheet strength.

7. Question: What initiatives drove the increase in CASA growth and how sustainable are these?

Answer: Our CASA growth stemmed from branch expansion in semi-urban areas, offering competitive services at lower costs than other banks. Given the underserved nature of these areas, we see continued opportunities for sustained growth.

8. Question: Do you feel that you will be needing fresh equity or long-term debt to support growth?

Answer: As a growing bank, we are always capital-hungry. While plans exist for raising capital, no concrete decisions have been made yet, especially as business growth accelerates.

9. Question: Can you share what proportion of your branches today offer gold loan products?

Answer: Currently, around 80% of our 788 branches offer gold loans. We ensure security by employing external valuers and maintaining industry-standard safekeeping practices for the gold collateral.

10. Question: Out of your total slippages of INR 468 crores in this quarter, how much was from MFI?

Answer: The majority of slippages were from the microfinance sector; however, I will get back to you with the exact percentage, as it needs specific figures from our records.

This concise summary encapsulates the key questions and answers from the earnings call while providing context and maintaining relevance in the discussion of the bank's quarterly performance.