Capital Small Finance Bank Limited — Q2 FY26 earnings call

Call held 30 Oct 2025

Management summary

Capital Small Finance Bank reported a robust Q2 FY26 with strong deposit and advances growth, reaching INR9,317 crores and INR7,907 crores respectively. Asset quality improved marginally with Gross NPA at 2.70%. Profit after tax grew 5% YoY to INR35 crores, but NIM compression to 4.04% impacted profitability growth. The bank remains focused on secured lending, branch expansion, and expects NIM and RoA to improve in coming quarters.

Highlights

  • Deposit base grew 20% YoY to INR9,317 crores, highlighting strong retail deposit franchise.

  • Gross advances grew 17.7% YoY to INR7,907 crores, driven by healthy disbursement activity.

  • Profit after tax increased 5% YoY to INR35 crores, supported by steady operating performance.

  • Gross NPA improved to 2.70% from 2.75% QoQ, reflecting continued prudence and strong recoveries.

  • Return on Assets (RoA) improved to 1.3% from 1.2% QoQ, indicating better profitability.

Concerns

  • Net Interest Margin (NIM) compressed to 4.04% in Q2 FY26 from 4.1% in Q1 FY26 due to interest rate decline.

  • Profit after tax growth of 5% YoY was significantly lower than gross advances growth of 18% YoY, primarily attributed to NIM compression.

  • Non-interest income had no contribution from treasury earnings in Q2 FY26, though management expects improvement.

Key financials

  1. Total Deposit ₹9,317 Cr +20%YoY
  2. Gross Advances ₹7,907 Cr +17.7%YoY
  3. CASA Ratio 33.9%
  4. NIM 4%
  5. Gross NPA 2.7%
  6. Net NPA 1.4%
  7. PAT ₹35 Cr +5%YoY
  8. RoA 1.3%
  9. Cost-to-Income Ratio 61.7%
  10. Capital Adequacy Ratio 24.2%
  11. Liquidity Coverage Ratio 234%
  12. Credit Costs 20%

What they filed

Q1 FY27: revenue up 16.6%, net profit up 28.1% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue224 235 231 247 256 +14%272 +16%273 +18%288 +17%
Net profit33 34 34 32 35 +6%34 +0%40 +18%41 +28%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

SegmentShare of PortfolioQoQ Growth
Agriculture Sector30%6%
Mortgage Segment26%4%
MSME and Business Loan23%11%
Corporate Loan14%5%
LAP (within Mortgage)—6%
Out-of-Punjab Advance Portfolio23%—

Capital allocation

high confidence
  • Liquidity Liquidity disclosed Capital Adequacy Ratio (CAR) stood strong at 24.2% and Liquidity Coverage Ratio (LCR) was 234%, reaffirming strong liability position and ample headroom for future growth.
    Our capital adequacy ratio remained strong at 24.2%, with average liquidity coverage ratio for the quarter stood at 234%, reaffirming our strong liability position and providing ample headroom for our future growth.

Guidance & targets

Credit Growth

  • Secured Loan Book Growth Credit Growth · FY26 · High confidence 20% plus
    As we look ahead, we plan to organically grow our secured loan book at the rate of 20% plus for FY26

    — Munish Jain, Executive Director

  • Advance Book Growth Credit Growth · next 3 to 3.5 years (by FY29) · High confidence Double
    and double our advance book over next three to three and a half years, that is by FY29.

    — Munish Jain, Executive Director

Branch Network

  • Branch Network Growth Branch Network · next 3 to 3.5 years (by FY29) · High confidence 1.5x
    With a goal, with a medium-term goal to grow our branch network by 1.5x in next three to three and a half years, that is by FY29.

    — Munish Jain, Executive Director

Profitability

  • NIM Profitability · H2 FY26 and beyond · High confidence Upward trajectory to 4.1% in H2 FY26, 4.2-4.3% in years to come

    From 4.04% in Q2 FY26 today

    We expect in H2, we are looking to see an improvement in the NIM to the Q4 FY25 number, that is 4.1%, and maybe slightly around 4.1%, and years to come, we looking forward for a continued expansion towards 4.2%, and then taking it above to the 4.2% to 4.3% levels.

    — Munish Jain, Executive Director

  • RoA Profitability · Q4 FY26 and by FY29 · High confidence 1.4% in Q4 FY26, 1.6% plus by FY29

    From 1.3% in Q2 FY26 today

    We are sticking to the guidance of around 1.4 in exit ROA for the last quarter. So, we are expecting ROA to further improve from present level of 1.3% from Q2. More growth will be coming in Q4. ...ROTA expansion in the coming year with a target to make it 1.6% plus

    — Munish Jain, Executive Director

  • RoE Profitability · by FY29 · High confidence 15% plus
    with ROE of 15% plus by next three years, that is FY29.

    — Munish Jain, Executive Director

Other Income

  • Non-interest income as % of assets Other Income · medium-term · Medium confidence 1% to 1.1%

    From 0.9% in Q2 FY26 today

    we believe over non-interest income on a medium-term basis shall be moving towards from 0.9 to 1 to 1.1.

    — Munish Jain, Executive Director

Partnership Lending

  • Contribution from partnership-led lending (annual disbursement) Partnership Lending · annually · Medium confidence 10-15%

    From 5% initially today

    starting maybe from 4% to 5% of the distribution -- annual distribution or disbursements to taking it around 10% to 15% of the annual disbursement is what we are internally targeting for.

    — Munish Jain, Executive Director

What to watch in Q3 FY26

NIM trajectory

H2 FY26
Current 4.04% in Q2 FY26
Target Improvement towards 4.1% (Q4 FY25 level)

Why it matters

NIM compression was the primary reason for lower PAT growth this quarter; its recovery is crucial for profitability.

We expect in H2, we are looking to see an improvement in the NIM to the Q4 FY25 number, that is 4.1%, and maybe slightly around 4.1%...

Risks & concerns

  • NIM compression due to interest rate decline

    medium

    NIM compressed to 4.04% in Q2 FY26 from 4.1% in Q1 FY26, impacting profit growth, but expected to improve in H2 FY26 due to deposit repricing and CRR reduction.

    Management acknowledged

  • Seasonally weak Q3 for loan growth

    low

    Q3 is historically a lower advance growth period, but management is working to minimize seasonality and expects to meet 20%+ FY26 growth target.

    Management acknowledged

  • Impact of floods on agricultural portfolio

    low

    Despite floods in Punjab, the impact on asset quality was muted, with GNPA improving and no write-offs, due to marginal exposure to riverine areas and portfolio diversity.

    Analyst downplayed

Q&A highlights

5 direct
Impact of Punjab floods on asset quality and agricultural loans Direct
The impact of the flood on our asset quality was very muted, which is visible through the numbers that despite the flood situation in the north part, which has affected around 25% to 35% of the geographies within Punjab... our asset quality continues to remain strong. We improved the GNPA, though marginally, from 2.75% a quarter back to 2.7%.

Addressed a potential major risk given the bank's exposure to agriculture and the recent natural calamity, with management confirming minimal impact and even an improvement in GNPA.

Asked by Shubham Selvadia

ROA guidance and levers for improvement Direct
We are sticking to the guidance of around 1.4 in exit ROA for the last quarter. So, we are expecting ROA to further improve from present level of 1.3% from Q2. ... The largest lever is the NIM lever, second largest lever is the opex lever and the third lever available is the non-interest income lever.

Provided clear numerical targets for RoA and detailed the three key strategic levers (NIM, Opex, Non-interest income) the bank plans to use to achieve these targets.

Asked by Aditya Mundra

Strategy and structure of partnership-led lending with NBFCs Direct
Our partner will be helping us in sourcing and identifying the right target. Within the policy framework, which is our credit policy framework, we will underwrite, but that partner will be responsible for the credit risk. Both his payouts as well as we will be getting an FLDG cover for any eventualities. The model is typically targeting the new geographies where we have not a thick, but a thin presence and to target our MSME set of customers and mortgage set of customers.

Clarified the operational model and risk mitigation strategy for a new growth channel, indicating a cautious yet strategic expansion into new geographies and segments.

Asked by Aditya Mundra

Lower profit growth despite strong advances growth Direct
The reason is only attributable to the NIM compression. Our NIM, which was typically 4.2 because of the sudden interest rate decline of 100 basis points by the Reserve Bank of India. And in a banking, the impact of the same has completely translated to the advance portfolio, where on the deposit portfolio, the impact will be visible on the repricing.

Addressed a key investor concern about the divergence between loan book growth and profit growth, attributing it directly to NIM compression and explaining the lag in deposit repricing benefits.

Asked by Ravi Naredi

Branch expansion strategy outside Punjab and future growth Direct
But going ahead, we have planned for the next three financial years that more than 30% of the branches are going to be out of Punjab and where we want to take our number of 200 to 1.5x of the number, that is 1.5x by 2029. So, the branch count we expect to grow to 300 by financial year 29 with 30% branches out of Punjab. And we will add more states to our kitty also. UP is already in the pipeline and the next, in the medium term, we will be adding other states as well.

Provided specific targets and timelines for geographical diversification and branch network expansion, signaling a clear strategic direction beyond its home state.

Asked by Shreyas Pimple

Aspiration to become a universal bank Partial
Mr. Bedi, we are ambitious and when you see a next level available, it keeps you more on the toes. So, we intend to be and want to be a universal bank, but with a strong footing. I will not be trying to give five years. I believe it is a longer period. I believe we should be aiming for a universal bank before that, but giving it a timeline now will be too premature.

Revealed the bank's long-term strategic ambition, though without a concrete timeline, indicating a potential future transformation.

Asked by Satinder Singh Bedi

2 min read 6 chapters

Detailed narrative

Robust Deposit and Advances Growth

Capital Small Finance Bank demonstrated strong growth in Q2 FY26, with total deposits reaching INR9,317 crores, marking a 20% year-on-year increase. Gross advances also grew significantly by 17.7% year-on-year to INR7,907 crores. The bank's credit-to-deposit ratio improved to 81.5% from 80.9% in the prior quarter. Disbursements for the quarter were INR805 crores, up 36% YoY, indicating healthy business activity.

Asset Quality Improvement and Stability

The bank maintained stable asset quality, with Gross NPA improving marginally to 2.70% from 2.75% in the prior quarter. Net NPA also remained stable at 1.38%. Notably, SMA 1 and 2 accounts reduced to 4.42% from 5.47% a quarter back, and write-offs were almost NIL during the quarter. Management stated that the impact of recent floods in Punjab on asset quality was muted, with over 50% of the INR31 crores slippage coming from agriculture but deemed not significant.

NIM Compression and Profitability Outlook

Net Interest Margin (NIM) for Q2 FY26 stood at 4.04%, a slight compression from 4.1% in Q1 FY26. This compression was identified as the primary reason for the 5% year-on-year growth in Profit After Tax (PAT) to INR35 crores, despite strong advances growth. Management expects NIM to improve in H2 FY26, targeting 4.1% by Q4 FY26 and 4.2-4.3% in the years to come, driven by deposit repricing benefits and CRR reduction.

Strategic Growth Levers and Targets

The bank aims for 20% plus secured loan book growth in FY26 and plans to double its advance book and grow its branch network 1.5x by FY29. RoA is targeted to reach 1.4% by Q4 FY26 and 1.6% plus by FY29, with RoE exceeding 15% by FY29. Key levers for profitability improvement include NIM expansion, improved operating efficiency (opex to average asset ratio at 3%), and growth in non-interest income, which is expected to rise from 0.9% to 1-1.1% in the medium term.

Branch Expansion and Diversification

Capital Small Finance Bank achieved a milestone of 200 branches, with 199 across five states and two Union Territories. The bank plans to significantly expand its footprint outside Punjab, targeting over 30% of new branches in other states over the next three financial years. New geographies like Rajasthan, Gujarat, and Madhya Pradesh are being targeted through a partnership-led lending model, which is expected to contribute 10-15% of annual disbursements.

Partnership-Led Lending Initiative

The bank has initiated partnership-led lending with selected high-rated NBFCs under an FLDG (First Loss Default Guarantee) framework. This strategy aims to expand into new geographies where the bank has a thin presence, targeting MSME and mortgage segments. The bank will underwrite the loans, with partners responsible for sourcing, servicing, and credit risk, backed by FLDG cover and security deposits, ensuring a controlled and risk-mitigated approach.

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