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    Capital Small

    CAPITALSFB
    Financial Services·30 Jan 2025
    Management Summary

    Capital Small Finance Bank reported a strong Q3 FY25, with PAT growing 18% YoY to ₹34 crores and RoA improving to 1.4%. Advances saw robust 19% YoY growth, and NIM expanded to 4.3%. Asset quality improved with GNPA at 2.6% and NNPA at 1.3%. The bank aims to further expand its CD ratio to mid-to-high 80s and improve RoA to 1.4% plus for FY25, leveraging its strong capital base and retail-centric deposit franchise.

    Highlights

    5

    • Profit after tax (PAT) grew 18% year-on-year to ₹34 crores, reflecting a return on assets (RoA) of 1.4% for Q3 FY25.

    • Gross advances increased by 19% year-on-year to ₹6,816 crores, with disbursement growth of 92% year-on-year, reversing historical Q3 negative growth trends.

    • Net Interest Margin (NIM) expanded to 4.3% in Q3 FY25 from 3.9% in the corresponding quarter, driven by improved operating margin of 1.9%.

    • Asset quality improved with GNPA at 2.6% and NNPA at 1.3%, coupled with a slippage ratio of 1.33% and an upgrade and recovery ratio of 1.2%.

    • The bank maintains a strong capital adequacy ratio of 25.8% and a high LCR of 239.2%, providing ample room for growth and CD ratio expansion.

    Concerns

    3

    • The loan-to-deposit ratio (LDR) reached 80.4% in H1 FY25, reflecting a persistent gap between deposit and credit growth in the banking sector.

    • Unsecured retail lending, including personal loans and credit cards, has seen delinquencies, particularly among self-employed and young borrowers, though Capital Small Finance Bank's direct exposure is minimal.

    • SMA 1 and SMA 2 as a percentage of advances stood at 6% at the end of December quarter, with a slight jump in Q3, though management attributes it to historical Q3 seasonality.

    What Changed2

    vs Q1 FY26

    Guidance items9 → 10 (+1)Risks discussed1 → 3 (+2)

    Key financials

    Single quarter

    14 metrics
    1. 01PAT₹34 Cr+17.2%YoY
    2. 02Gross Advances₹6,816 Cr+19%YoY
    3. 03Deposits₹8,384 Cr+12%YoY
    4. 04NIM4.3%
    5. 05RoA1.4%

    Capital allocation

    1
    high confidence
    CategoryHeadline
    Liquidity

    Liquidity disclosed

    Capital adequacy ratio is at 25.8% at the end of the Q3 FY '25 and our LCR is at 239.2%, which is giving us a legroom to further improve our CD ratio.

    Guidance & targets

    10
    CategoryTargetPriority
    Credit Growth
    Loan book growth
    20% plus
    		High
    Profitability
    Annualized RoA
    1.4% plus
    		High
    CD Ratio
    Credit-to-Deposit Ratio
    mid- to high 80s
    		High
    Non-Interest Income
    Non-interest income to assets ratio
    10 to 15 basis points expansion
    		Medium
    Opex
    Opex to average assets
    similar range
    		High
    Geographical Concentration
    Punjab advances share
    reduce
    		Medium
    Corporate/NBFC Lending
    Corporate/NBFC lending share of portfolio
    below 15%
    		High
    Asset Quality
    PCR
    above 50%
    		High
    Asset Quality
    SMA 1 and SMA 2 as % of advances
    4.5% to 5.5%
    		Medium
    Fee Income
    Fee income as % of assets
    0.85% to 1%
    		High

    CD Ratio Expansion

    FY26 to FY27
    Current81.1%
    Targetmid- to high 80s

    Why it matters

    CD ratio expansion is a key lever for NIM improvement and overall RoA growth, indicating efficient utilization of deposits for lending.

    The average credit-to-deposit ratio for the bank has inched up from 78.4% on December FY '24 to 81.1% in quarter 3 FY '25. We aim to take this ratio to mid- to the high 80s going ahead.

    How to verify

    guidance_and_targets[category='CD Ratio'].target_value

    Risks & concerns

    3
    RiskSeverity

    Geographical concentration in Punjab

    Punjab advances constitute 79.11% of the portfolio, down from 82.68% in March 2023, with active efforts to diversify. — Management acknowledged

    medium

    Industry-wide delinquencies in unsecured retail lending

    While the industry sees issues, Capital Small Finance Bank's unsecured lending is only 0.2% of its portfolio, making it less susceptible. — Management downplayed

    low

    Slippage in SMA 1 and SMA 2 accounts

    SMA 1 and 2 increased to 6% of advances, but management attributes this to historical Q3 seasonality and aims to bring it down to 4.5-5.5%. — Analyst downplayed

    low

    Q&A highlights

    8

    “We have identified three levers for our ROTA expansion. First lever being the NIM expansion... Second lever, which we have identified for us is the noninterest income... The third lever which we have identified is the opex.”

    Management outlined specific strategies (CD ratio expansion, non-interest income growth, opex optimization) to improve RoA, providing clarity on future profitability drivers.

    asked by Shailesh Kanani

    2 min read6 chapters

    Detailed Narrative

    01

    Robust Financial Performance in Q3 FY25

    Capital Small Finance Bank reported a strong Q3 FY25 with profit after tax (PAT) growing 18% year-on-year to ₹34 crores, and annualized Return on Assets (RoA) improving to 1.4%. Pre-provisional operating profit increased by 22% to ₹47 crores. The Net Interest Margin (NIM) expanded to 4.3% in Q3 FY25 from 3.9% in Q3 FY24, reflecting improved operational efficiency and a cost-to-income ratio of 62.1%.

    02

    Strong Advances and Deposit Growth

    Gross advances grew by 19% year-on-year to ₹6,816 crores as of December 31, 2024, with fresh disbursements increasing by 92% year-on-year to ₹737 crores in Q3 FY25. This reversed the historical Q3 trend of negative growth. Deposits also showed healthy growth, increasing by 12% year-on-year and 8% quarter-on-quarter to ₹8,384 crores, maintaining a CASA ratio of 39.1%.

    03

    Improved Asset Quality and Prudent Provisioning

    The bank demonstrated improved asset quality with Gross NPA (GNPA) at 2.6% and Net NPA (NNPA) at 1.3% as of December 31, 2024. The slippage ratio for Q3 FY25 stood at 1.33%, with an upgrade and recovery ratio of 1.2%. The Provision Coverage Ratio (PCR) remains strong at over 50%, and the bank is committed to maintaining this, with a focus on 100% PCR for older NPAs.

    04

    Strategic Focus on CD Ratio and Non-Interest Income

    Management highlighted three key levers for RoA expansion: NIM expansion through CD ratio improvement, growth in non-interest income, and opex optimization. The bank aims to increase its CD ratio from the current 81.1% to mid- to high 80s in FY26-FY27. They also plan to expand non-interest income by 10-15 basis points, with a target of 0.85% to 1% of assets in Q4 FY25.

    05

    Diversification and Controlled Corporate Lending

    The bank is actively working to reduce its geographical concentration in Punjab, which currently accounts for 79.11% of advances, by expanding into neighboring geographies like Haryana. Corporate/NBFC lending, currently at 12% of the portfolio, will be capped below 15%, with a selective approach to well-leveraged and secured NBFCs. Direct microfinance exposure remains minimal at 1-1.5% of total advances.

    06

    Capital Adequacy and Liquidity Strength

    Capital Small Finance Bank maintains a robust Capital Adequacy Ratio (CAR) of 25.8% and a high Liquidity Coverage Ratio (LCR) of 239.2%. This strong capital base provides significant headroom for future growth and expansion without immediate need for further capital infusion. The bank's liability mix is positively skewed towards deposits, with retail deposits constituting 93.2% of total deposits.

    This is an AI-generated summary of a publicly available earnings call transcript. It is for informational purposes only and does not constitute investment advice, a recommendation, or an endorsement. inve.money is not a SEBI-registered investment advisor. Please consult a qualified financial advisor before making any investment decisions.