ESAFSFB - ESAF Small Finance Bank Ltd Share Price

Management's outlook for FY '26 emphasizes a gradual stabilization in the banking sector, particularly in microfinance. Key forward-looking points include:

1. Projected Credit Costs: Management expects credit costs to reduce significantly from 9.6% in FY '25 to approximately 4% in FY '26. This reduction is anticipated due to improved borrower repayment behaviors and regulatory relaxations.

2. Growth Expectations: ESAF Small Finance Bank is targeting an overall growth of 15% to 20% for FY '26, focusing on expanding its portfolio while maintaining asset quality.

3. Secured Lending Strategy: The bank plans to increase the share of secured loans to 70% of the total loan book by March 2027. Currently, secured loans account for 52% of the loan book, up from 29% in March 2024.

4. Geographic Diversification: The share of loans from Kerala has decreased from 56% in FY '21 to 36% in FY '25 as part of an effort to diversify into other high-potential markets.

5. Enhanced Provisioning: Acknowledging current stresses in the microfinance sector, management has adopted a proactive approach by setting aside provisions beyond regulatory requirements, maintaining a provision coverage ratio of over 80%.

6. Technology Transformation: ESAF has initiated its ESAF 2.0 transformation project aimed at enhancing customer experience and operational efficiency through technology upgrades and process automation.

7. Loan Book and Deposit Growth: The total loan book as of Q4 FY '25 was INR 19,643 crores, stable compared to the previous year, while deposits increased by 17% to INR 23,276 crores.

These strategies reflect the bank's commitment to financial inclusion, risk management, and sustainable growth amidst changing market dynamics.

1. Question: Can you elaborate on what initiatives helped drive the CASA growth, and how do you see it trending in FY '26? Answer: We've focused employee variable pay on CASA growth rather than overall deposit growth. Specific branch targets for CASA numbers were set, which significantly drove our performance. Moving into FY '26, we aim to sustain this momentum by continuing these targeted initiatives and enhancing customer engagement strategies.

2. Question: With over 10.4 lakh new customers added in FY '25, how do you plan to deepen wallet share and reduce customer churn? Answer: We observe a churn rate similar to the industry. To combat this, we've implemented a structured onboarding process encouraging user engagement through defined transactions within the first three months, fostering retention and enhancing long-term relationships.

3. Question: Are you planning any further expansion or optimization in FY '26, particularly in underpenetrated regions? Answer: Yes, we plan to add 38 branches in FY '26, primarily in rural and unbanked areas, as approved by our Board. This expansion aligns with our strategy to enhance accessibility in these regions.

4. Question: How do you plan to protect margins in FY '26 given the shift to secured lending and high provisioning? Answer: Our net interest margin has faced pressure from increased slippages in high-yielding micro loans. We've begun rationalizing deposit rates to align with market changes. We anticipate operating steadily at an NIM of around 8%, benefiting from a higher percentage of secured loans moving forward.

5. Question: What is the roadmap to profitability for FY '26? Answer: We're optimistic about turning a profit in the second half of FY '26. We expect to see improvements as the year progresses, particularly in Q3 and Q4, through controlled growth and stringent operational measures.

6. Question: How much of the INR 332 crore provision in Q4 is attributable to the micro loan segment, and when do you expect normalization? Answer: Roughly INR 311 crore of that provision relates to the micro banking book. We predict a normalization trend will start materializing in the second half of FY '26, as economic conditions improve and repayment behaviors stabilize.

7. Question: Do you foresee any further write-offs in FY '26? Answer: Additional write-offs may occur depending on delinquency levels. While significant moderation is expected by H2 FY '26, some technical write-offs might still be necessary based on the evolving asset quality landscape.

8. Question: How sustainable is the current 80.5% provision coverage ratio (PCR)? Answer: Our PCR is sustainable, as it's fortified by ongoing delinquencies primarily stemming from the unsecured book. We aim to adhere to regulatory and internal guidelines, ensuring we maintain this coverage while addressing potential future risks.

9. Question: Can you elaborate on how you plan to scale secured loans further and what segments are seeing the most traction? Answer: We've established dedicated regional credit hubs and optimized our sales force to enhance secured lending, particularly in MSME, mortgages, and gold loans. The traction we're seeing stems from a focus on risk management and resource allocation.

10. Question: What growth outlook do you foresee for FY '26, particularly regarding credit costs? Answer: We're targeting a growth rate of about 15-20% for FY '26. We're also expecting credit costs to decrease from the levels seen in the last two fiscal years, moving towards levels around 4.25%, reflecting our ongoing stability and improved asset quality management.