Equitas SFB shares crash 15%, extend two-day decline to 35% after CEO steps down over conflict of interest
The lender's longtime CEO P N Vasudevan said he would resign amid conflict-of-interest concerns as his daughter runs an NBFC
Equitas Small Finance Bank shares crashed 15% on October 30, extending their two-day fall to 35% after its longtime CEO P N Vasudevan said he would resign amid conflict-of-interest concerns as his daughter runs a non-banking finance company. Vasudevan, who has led the lender as managing director and CEO for over a decade, said in his resignation letter that investors had repeatedly raised the issue and that it was weighing on the stock.
Vasudevan has led Equitas since it started off as a microfinance institution in 2007 and oversaw its conversion to a small finance bank in 2016. A small finance bank is a lender that provides basic banking and credit services to underserved segments. At 10:10 am on October 30, Equitas SFB shares were trading 15% lower at Rs 48.5 apiece. Vasudevan's daughter, Varshini Vasudevan Pathangi, founded Unico Housing Finance, an unlisted non-banking finance company, in 2023.
The arrangement had been disclosed to the board and the Reserve Bank of India, and there was no conflict of interest, Vasudevan said in his resignation letter. "Sometimes perceptions are stronger than reality," Vasudevan said, adding that investors had told him the "overhang" was causing the shares to underperform. This is not the first time Vasudevan has tried to move out. In 2022, he planned to step down to pursue philanthropic activities but withdrew the resignation after the board asked him to continue.
The board said on Thursday it has asked Vasudevan to stay on until a successor is found. The bank has asked its nomination and remuneration committee to identify internal and external candidates. Reserve Bank of India had earlier this year reached out to the board and top management of the bank to understand the relationship between the lender and Unico, according to media reports. Equitas said in August it had made only one deposit deal with Unico and no other transactions had been made until then.
The bank's total business crossed Rs 1 lakh crore in the September quarter, when it posted its highest-ever quarterly profit of Rs 218 crore, according to Vasudevan. The bank reported a net profit of Rs 218 crore for the September quarter, nine times higher than the figure reported in the year-ago quarter. Its total income rose 28% on year to Rs 2,358 crore. The bank's low base in the year-ago quarter and a 44% fall in its provisions and contingencies led to the sharp rise in its net profit.
Its provisions and contingencies were reported at Rs 115 crore. Its net interest income was at Rs 1,026 crore for the quarter, up 33% on year. However, the bank's net interest margin contracted 55 basis points sequentially to 6.69%. This decline was due to the bank's surplus liquidity and higher funding costs, brokerages noted. Equitas Small Finance Bank posted a better Q2, though the sudden resignation of the MD and CEO eclipsed the operational performance.
The bank expects to identify a suitable successor and complete the selection process in the next 3-4 months, by submitting the appropriate candidate’ recommendation for RBI approval. Q2 highlights were: (a) NIM moderating by 7bps QoQ, led by a rise in the cost of funds; (b) lower provisions on decent and maintained asset quality trend and (c) slightly higher opex, said Elara Securities. Underlying environment is improving on both asset quality and business growth.
Business mix changes and liabilities pressure have put NIMs at a disadvantage, although rate hike cycle will benefit to some extent. We recommend BUY (post the sharp correction) with a target price of Rs 77, based on 1.0x Sep 2028E P/ABV. Key risks are a delay in the appointment of the new MD and restricted asset quality improvements given emerging risks in select geographies, especially related to agri, the brokerage added.
"Equitas SFB reported a steady quarter, with healthy earnings supported by higher other income and lower provisions, despite a PPoP miss. NIM contracted 55 bps QoQ to 6.69%, primarily due to excess liquidity and higher funding costs. The bank expects an 18-20 bps recovery in NIM by 4QFY27 as surplus liquidity gets deployed, though further CoF repricing may exert near-term pressure. Advances growth was healthy, led by traction across SBL, VF, HF and other secured segments, while deposit growth improved with a moderation in the CD ratio.
"Asset quality trends were encouraging, with improving GNPA/NNPA ratios and moderation in credit costs. Management raised its FY27 RoA guidance to 1.35% from 1.2%, supported by margin recovery, benign credit costs and operating leverage. The impending MD & CEO transition remains a key monitorable, although management expects no disruption to business continuity. We increase our earnings estimates by 8%/2.5% in FY27/FY28 and estimate RoA/RoE of 1.3%/14.8% by FY28E. Reiterate BUY with a revised target price of Rs 75 (1.2x FY28E ABV)," said Motilal Oswal Financial Services.
