Three reasons why Equitas Small Finance Bank stock could rebound

livemint.com:

Subscribe to enjoy similar stories. Stocks of companies that have anything to do with microfinance – including banks, small finance banks, and non-banking financial companies (NBFCs) – have been hammered on the bourses over the past three quarters. In the September Quarter, small finance banks reported a record percentage of microfinance institution (MFI) loans that had remained unpaid for 30-180 days.

According to Sadaf Sayeed, CEO of Muthoot Microfin, there could be a few reasons why. First, the average ticket size of SFBs is higher than those of NBFCs and NBFC-MFIs. Second, SFBs’ MFI portfolios could be slightly more concentrated in states that are showing signs of stress.

Third, small finance banks are moving away from unsecured micro loans and focusing more on building secured loan books, so their MFI book base is not growing while NPAs are. Also read | 25x in returns, ₹25 lakh for every ₹1 lakh: Can Varun Beverages do it again? Regardless of the type of lender – banks, small finance banks or NBFCs – the fact remains that microfinance lenders are in trouble. But why is Equitas SFB, which only has 16% of its total loan book exposed to microloans, down 40% over the past year? It’s down by as much as Ujjivan Small Finance Bank, which has almost 50% exposure to MFI loans.

And why is Equitas trading below its median three-year price-to-book? Is the market overestimating the negative impact of the MFI segment on it? We believe there are three primary reasons why Equitas is currently out of favour. One possible explanation is that the customer profile for small business loans (SBL), which constitute about 41% of the portfolio, is not considered materially different from that of microloans. According to management, there is