Key Takeaways
- Equitas SFB posted a 36% YoY PAT rise to ~₹900 m, beating estimates by 27%.
- Net interest income (NII) grew 4.1% YoY and 10.1% QoQ, while the net interest margin (NIM) expanded 43 bps to 6.72%.
- Cost of funds fell to 7.13% from 7.35%, sharpening earnings.
- The bank sold ₹548.5 m of NPA assets to an ARC, cleaning up its balance sheet.
- Motilal Oswal reiterates BUY with a target price of ₹80, implying a 1.4x FY27E price‑to‑book.
Most investors missed the fine print on Equitas’s earnings surge—your portfolio may be paying for that oversight.
Why Equitas Small Finance Bank’s Earnings Beat Signals a Sector Shift
Equitas Small Finance Bank (EQUITASB) delivered a net profit after tax (PAT) of roughly ₹900 million for Q3 FY26, a 36% year‑on‑year increase and a 27% upside over consensus forecasts. The acceleration stems from a combination of higher net interest income (NII) and a sizable reduction in non‑interest expense. In a sector where many small finance banks (SFBs) are still grappling with asset quality, Equitas’s ability to outpace peers suggests a competitive edge that could ripple through the broader SFB universe.
Impact of NIM Expansion and Cost‑of‑Funds Decline on Profitability
Net interest margin (NIM) – the spread between the interest earned on assets and the interest paid on liabilities – widened by 43 basis points (bps) to 6.72% in Q3 FY26. Simultaneously, the cost of funds, the average rate the bank pays on deposits and borrowings, dropped from 7.35% to 7.13% quarter‑over‑quarter. The twin effect of a higher NIM and lower funding cost translates directly into a stronger bottom line. For investors, a rising NIM is a leading indicator of pricing power and efficient asset‑liability management, while a declining cost of funds reflects a healthier deposit mix and lower reliance on expensive wholesale funding.
What the NPA Asset Sale Means for Balance‑Sheet Health
During the quarter, Equitas off‑loaded ₹548.5 million of non‑performing assets (NPAs) to an asset reconstruction company (ARC). This transaction not only reduces the gross NPA ratio but also frees up provisioning capital, allowing the bank to redeploy funds into higher‑yielding loans. Historically, SFBs that aggressively clean their balance sheets tend to see faster credit‑cost recovery and improved return on assets (RoA). Motilal Oswal now projects a RoA of 1.0% and a return on equity (RoE) of 10.5% by FY27, aligning with the bank’s strategic thrust to boost profitability without compromising asset quality.
Comparative Landscape: How Tata, Adani, and Peer SFBs Are Performing
When we line up Equitas against larger peers such as Tata Small Finance Bank and the newly listed Adani SFB, a few contrasts emerge. Tata’s NIM has been hovering around 6.4% with a modest YoY profit growth of 12%, while Adani’s aggressive loan‑book expansion has pressured its NIM to 6.1% and kept its RoE below 9%. Both peers are still wrestling with higher cost‑of‑funds profiles, averaging 7.4%‑7.6% in the same period. Equitas’s superior NIM and lower funding cost give it a relative valuation advantage, especially when the market assigns a premium to banks that demonstrate disciplined cost control.
Historical Parallel: Small Finance Banks’ Turnaround Patterns
The last time an SFB posted a double‑digit profit jump while simultaneously cleaning up NPAs was in FY22 with Ujjivan Small Finance Bank. That bank’s share price rallied over 70% in the twelve months following the earnings beat, driven by a sustained RoE above 12% and a steady decline in its NPA ratio. The lesson for investors is clear: a profit surge paired with balance‑sheet remediation can act as a catalyst for long‑term price appreciation, provided the bank maintains its operational momentum.
Investor Playbook: Bull vs Bear Cases for Equitas SFB
Bull Case
- Continued NIM expansion above 6.7% as the bank tightens its funding mix.
- Further NPA asset sales and improved credit underwriting drive RoA toward 1.2% by FY28.
- Motilal Oswal’s target of ₹80 represents a 1.4x FY27E price‑to‑book, offering upside if the bank sustains earnings growth.
- Sector tailwinds: regulatory support for SFBs, higher rural credit demand, and favorable interest‑rate environment.
Bear Case
- Re‑pricing pressure on loan books could compress NIM, especially if competition for deposits intensifies.
- Unexpected spikes in fresh NPAs could erode profit margins and force higher provisioning.
- Macro‑economic slowdown impacting borrower repayment capacity, particularly in micro‑enterprise segments.
- Valuation risk if the market re‑prices the sector amid broader banking stress.
Bottom line: Equitas Small Finance Bank has delivered a compelling earnings beat anchored by a healthier NIM, lower cost of funds, and a proactive NPA cleanup. Whether you choose to ride the upside or hedge against downside risk, the data points to a stock that warrants a closer look in any bank‑focused portfolio.