Capital Small Finance Bank Limited — Q3 FY25 earnings call

Call held 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

  • 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

  • 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.

Key financials

  1. PAT ₹34 Cr +17.2%YoY
  2. Gross Advances ₹6,816 Cr +19%YoY
  3. Deposits ₹8,384 Cr +12%YoY
  4. NIM 4.3%
  5. RoA 1.4%
  6. ROE 10.9%
  7. GNPA 2.6%
  8. NNPA 1.3%
  9. CASA Ratio 39.1%
  10. Cost-to-Income Ratio 62.1%
  11. PCR 50%
  12. Slippage Ratio 1.3%
  13. Credit Cost 0.1%
  14. Fee Income ₹18.17 Cr

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.

Capital allocation

high confidence
  • 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.
    Our ROTA has increased to 1.4% in Q3 FY '25 and return on average advances increased to 2.1% against 1.3% and 2% respectively, in the corresponding quarter. Our ROE during the Q3 is 10.9% against 10.8% in the Q2 FY '25. The 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

Credit Growth

  • Loan book growth Credit Growth · FY25 · High confidence 20% plus
    Going forward, we remain committed towards achieving our loan book growth of 20% plus in FY '25 by capitalizing on the growing MSME, mortgage segment coupled with expanding middle income group segment.

    — Munish Jain

Profitability

  • Annualized RoA Profitability · FY25 · High confidence 1.4% plus
    Our focus on expansion of NIM, NII and increasing fee income will be the key drivers for our targeted ROA -- annualized ROA of 1.4% plus for FY '25. And further, we intend to expand our ROTA going forward.

    — Munish Jain

CD Ratio

  • Credit-to-Deposit Ratio CD Ratio · FY26 to FY27 · High confidence mid- to high 80s
    I'm just saying the target perspective, we intend to take our CD ratio in FY '26 to FY '27 period to mid- to the high 80s on an average basis.

    — Munish Jain

Non-Interest Income

  • Non-interest income to assets ratio Non-Interest Income · going forward · Medium confidence 10 to 15 basis points expansion
    We intend to expand this ratio by 10 basis points to 15 basis points as we move forward. And we believe there is enough opportunity to expand it as we move forward in the coming years.

    — Munish Jain

Opex

  • Opex to average assets Opex · next 1 year · High confidence similar range
    The opex, which is presently, on the basis of the Opex to the average assets is typically in the range of 3.05% to 3.15%/ 3.2%. I believe for the next 1 year, it will remain in the similar range, plus/minus 5 basis to 10 basis points.

    — Munish Jain

Geographical Concentration

  • Punjab advances share Geographical Concentration · going forward · Medium confidence reduce

    Previously 79.11% → reduce

    Statistically, if you look into this particular number, as on March 31, 2023, the Punjab advances constituting 82.68%, which presently as on December 31, 2024 end, it is 79.11%. So we are able to reduce it by around 3.5% to 4%.

    — Munish Jain

Corporate/NBFC Lending

  • Corporate/NBFC lending share of portfolio Corporate/NBFC Lending · going forward · High confidence below 15%

    From 12% today

    Typically, Pritesh, if you look into the loans to the corporates, even though it is 12% of the portfolio, which was 11% at the end of the last quarter. we intend to keep it below 15% overall basis as we move forward.

    — Munish Jain

Asset Quality

  • PCR Asset Quality · ongoing · High confidence above 50%
    We have our internal guidance that we will not let the PCR slip below 50%. And in the event the PCR slip below 50% after application of the regulatory provision, we attempt to made the additional provision. And if you look into the current quarter end, our PCR is more than 50%.

    — Munish Jain

  • SMA 1 and SMA 2 as % of advances Asset Quality · ongoing · Medium confidence 4.5% to 5.5%

    Previously 6% → 4.5% to 5.5%

    So we are also confident and very working hard to again bring it back to the similar levels because we have internal targeting it to keep it around 4.5% to 5.5%.

    — Munish Jain

Fee Income

  • Fee income as % of assets Fee Income · Q4 · High confidence 0.85% to 1%

    Previously 0.73% → 0.85% to 1%

    Going forward, in Q4, I'm anticipating our fee income to be in the range of 0.85% or rather 0.9% to 1% in the Q4. So that is what we are anticipating for the Q4.

    — Munish Jain

What to watch in Q4 FY25

CD Ratio Expansion

FY26 to FY27
Current 81.1%
Target mid- 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.

Risks & concerns

  • Geographical concentration in Punjab

    medium

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

    Management acknowledged

  • Industry-wide delinquencies in unsecured retail lending

    low

    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

  • Slippage in SMA 1 and SMA 2 accounts

    low

    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

Q&A highlights

7 direct
ROA expansion levers Direct
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

CD ratio target for FY26 Direct
We intend to expand our CD ratios to mid- to the high 80s in FY '26.

Analyst pressed for a specific CD ratio target for FY26, and management provided a clear range, indicating confidence in loan growth and deposit utilization.

Asked by Shailesh Kanani

Geographical concentration and diversification plans Direct
As on March 31, 2023, the Punjab advances constituting 82.68%, which presently as on December 31, 2024 end, it is 79.11%. So we are able to reduce it by around 3.5% to 4%.

Management acknowledged the concentration risk in Punjab and detailed their strategy to diversify by opening new branches outside Punjab and focusing on Haryana as the 'next Punjab'.

Asked by Shailesh Kanani

Fee income dip in Q3 Direct
The fee income, which is around 0.1% of the asset basis, which is accrued and which is related to the current quarter is not being taken to the P&L since we are recognizing and debiting that particular fee income on a half year-end basis.

Analyst questioned the dip in fee income, and management clarified it was due to an accounting practice of recognizing certain fee income on a half-yearly basis, not an underlying business issue.

Asked by Shreepal Doshi

Corporate loan mix and yield impact Direct
Typically, Pritesh, if you look into the loans to the corporates, even though it is 12% of the portfolio... we intend to keep it below 15% overall basis as we move forward... Our credit cost remained range bound at 0.1% during Q3 FY '25.

Analyst raised concerns about the rising corporate loan mix and its potential impact on margins. Management assured that they are selective, cap exposure at 15%, and yields are comparable, with no significant impact on credit cost.

Asked by Pritesh

SMA 1 and SMA 2 jump and asset quality outlook Direct
Balkrushna, typically, if we look into historically, historically, always Q3 and Q1, we will find some sort of jump in the SMA 1 and SMA 2. But despite that particular jump, even if I talk about the absolute basis, we are still 6% SMA 1 and 2 put together, so which is also a lower number.

Analyst questioned the Q-o-Q jump in SMA 1 and 2. Management attributed it to historical Q3 seasonality and reiterated their commitment to bring it back to target levels (4.5-5.5%), indicating no stress build-up.

Asked by Balkrushna Vaghasia

RBI merger reports for small finance banks Direct
I can say we were never part of any such discussion with the regulators. We are never being part of any such discussions as we talk. And even if I look into that particular article, if I just talk about the article, the article was putting an emphasis on the lenders with the unsecured piece. And just to mention, our unsecured pie is 0.2%.

Analyst inquired about recent news regarding RBI suggesting mergers for SFBs with geographical concentration or stress. Management clarified they were not part of such discussions and highlighted their minimal unsecured lending (0.2%), differentiating themselves from the reported concerns.

Asked by Balkrushna Vaghasia

ASBA facility activation Partial
Anant-ji, since there are certain things which are in the regulatory approval based. We are completely ready and have in principle approval, technologically good to go. We're just waiting for the final go ahead from the respective regulator.

Analyst asked about the ASBA facility. Management confirmed readiness and in-principle approval but stated they are awaiting final regulatory go-ahead, indicating a pending external factor.

Asked by Anant Mundra

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Detailed narrative

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%.

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%.

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.

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.

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.

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.

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