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Capital Small Finance Bank Ltd

| Q3 & 9 Months FY26 Earnings Conference Call

BULLISH SENTIMENT

Report Source

⬤4th Feb 26

Summary : Capital Small Finance Bank reported strong Q3 FY26 growth in deposits and advances, stable asset quality, and expects future NIM and ROA expansion driven by deposit repricing and strategic geographic and product diversification.

Management Perspective positive : The quarter saw steady deposit mobilization, balanced credit growth and stable margins, supported by disciplined execution. We are confident of normalising SMA levels to below 5% by March 31, 2026. We expect NIM expansion and ROTA improvement in coming quarters.

Concall Report Analysis & Insights

Business Overview

  1. Total deposits reached INR9,931 crores, growing 18.5% year-on-year with CASA at 35.9%.
  2. Gross advances grew to INR8,164 crores, up 19.8% year-on-year, driven by MSME, mortgage, and agriculture.
  3. Quarterly disbursements rose to ₹919 crores, a 25% year-on-year increase, supported by festive demand.
  4. Asset quality remained stable with gross NPAs at 2.68% and net NPAs at 1.35%.
  5. Profit after tax (PAT) stood at INR38 crores (excluding exceptional item), up 12% year-on-year.

Future Growth Prospects

  1. Targeting 20%+ secured loan book growth for FY26 and INR16,000 crores by FY29.
  2. Aiming for NIM expansion from deposit cost moderation and improving CD ratio.
  3. Expect ROTA to improve to 1.6%+ and ROE to 15%+ by FY29.
  4. Planning to expand branch network to 300+ by FY29, focusing on semi-urban markets.
  5. Partnership-led lending with NBFCs to boost growth in new geographies.

Management Insights

  1. India's economic conditions show stability with 7% GDP growth and recovering rural demand.
  2. Benign inflation environment supports household purchasing power and consumption.
  3. RBI reduced repo rate to 5.25%, supporting growth while maintaining macro stability.
  4. Bank's strategy focuses on secure, profitable growth and productivity improvement.
  5. Committed to long-term value creation through responsible banking and financial inclusion.

Signs of Skepticism

  1. NBFC MFI recovery is ongoing, with INR7 crores net NPA still pending.
  2. SMA-1 and SMA-2 pools increased quarter-over-quarter, though management attributes it to seasonality.
  3. Agricultural land recovery is not a 'cakewalk' despite collateralization and favorable LTV.
  4. The full benefit of deposit repricing is yet to be completely realized, with only initial signs visible.

Risk Factors

  1. Persistent pricing pressure on term deposits due to intense competition.
  2. Lag in liability repricing, impacting NIM in the short term.
  3. Monetary policy changes could influence interest rate environment and margins.
  4. Temporary uptick in SMA-1 and SMA-2 due to seasonal agricultural cash flows.

Good To Know

  1. 99% of the loan book is secured, with 90% of non-corporate portfolio collateralized by immovable properties.
  2. Average ticket size of loan portfolio is INR17.8 lakhs, reflecting a granular, retail-focused approach.
  3. Capital adequacy ratio is strong at 21.6%, with LCR at 215.8%.
  4. Branch network stands at 203 branches across 5 states and 2 union territories.
  5. The bank has reduced 1-year term deposit rates by 60 basis points over 9 months.

Key Drivers

  1. Deposit repricing to expand NIM.
  2. Secured loan book growth continues.
  3. Geographic expansion drives advances.
  4. Operating efficiencies improve ROTA.

Key Analyst Discussions

Competitive Environment

  1. Bank is well-placed to handle competition through outreach programs and customer connects.
  2. Yield on advances stabilized at 11%, with future trajectory dependent on monetary policy.
  3. Targeting high-rated, adequately leveraged NBFCs for non-MFI lending, with 72.1% being A-rated or above.

Financial Highlights

  1. Management expects NIM expansion of 3-5 bps in Q4, 10 bps in Q1, and 15 bps in Q2 FY27 from deposit repricing.
  2. Cost of deposit declined to 5.86% in Q3 FY26 from 5.92% in Q2 FY26.
  3. Credit cost for Q3 FY26 was 0.2%, expected to remain range-bound between 0.15% to 0.25%.
  4. ROA is targeted to reach 1.4% in FY27 and 1.6%+ by FY29, driven by NIM expansion and opex optimization.
  5. Cost-to-income ratio stood at 60.9% (excluding one-time charge), with a declining trend expected medium-term.

Product Composition

  1. MSME/business segment grew 10% QoQ and 42% YoY, LAP grew 3% QoQ and 18% YoY.
  2. Business loan portfolio increased to 25% from 23% in Q2 FY26.
  3. Agriculture portfolio moderated marginally to 28% from 30% in Q2 FY26.
  4. New geographies like Delhi NCR, Rajasthan, J&K show higher traction in MSME and mortgage/LAP.
  5. Agriculture book gross NPA is around 4.7%, MFI book gross NPA is 28%.

Strategic Considerations

  1. Geographic expansion outside Punjab outpaced overall bank growth.
  2. Partnership-led lending with NBFCs is P&L positive and growth booster in new geographies.
  3. Loan book mix by FY29 will remain 75-80% in Agriculture, housing loan, LAP, and business loan.
  4. Agriculture loans are secured by land mortgage with LTV downward of 50%.
Capital Small Finance Bank Ltd (CAPITALSFB) Concall Report Analysis & Insights | Dhanarthi