Capital Small Finance Bank Ltd Q2 FY2025 Concall Summary

Key Takeaways

• PAT up 37%, NIM steady at 4.2%: Net profit grew on a 20% NII rise and cost-to-income improvement, while NIM held despite an accounting reclassification that shifted penal charges out of interest income.
• Asset quality is stable, not yet improving: GNPA fell to 2.6% and NNPA to 1.3%, but slippage and upgrades nearly offset each other, leaving the stock of bad loans flat.
• The growth engine is shifting outside Punjab: The out-of-Punjab book rose to 19% of loans from 16% a year ago, while the legacy Punjab book still grew 21% YoY.
• Disbursements fell 22% QoQ by design: Management front-loaded some large corporate disbursements into Q1; H1 growth of 33% keeps the full-year 22%+ target in sight.
• What to watch next quarter: Whether collection efficiency stabilizes after dipping to 97.1%, the pace of branch openings toward the 200+ target, and any change in the MFI exposure call.

Profitability & Margins

• NIM held at 4.2% despite a regulatory change that moved penal charges (0.12% contribution) from interest income to non-interest income. A 3 bps CD ratio increase would normally have added 12-15 bps to NIM, but the reclassification offset that gain entirely.
• Cost-to-income ratio improved to 61.4% from 64.8% a year ago and 63.2% sequentially, driven by operating leverage as income grew faster than costs.
• Non-interest income nearly doubled to ₹26 cr from ₹17 cr in Q2 FY24, with core commission and brokerage at ₹24.2 cr. The distribution franchise (bancassurance) contributed ₹11.55 cr, up from ₹7.12 cr. Treasury profit was negligible at under ₹1 cr.
• ROA guidance held at 1.4%+ for the full year, with management confident of expanding it further in coming years through NIM and other drivers.

Munish Jain: "Earlier, the penal interest was the component of the NIM. Now, that has moved to the non-interest, which is presently for the current quarter contributing 0.12%."

Asset Quality & Credit

• GNPA improved to 2.6% from 2.7% a year ago, and NNPA to 1.3%, attributed to streamlined credit assessment and risk management. SMA 1&2 also improved, from 6.4% to 5%.
• Slippage and upgrades nearly matched: slippage ratio of 1.27% (₹21.8 cr) was almost fully offset by an upgrade and recovery ratio of 1.2% (₹18.3 cr), so the absolute NPA stock stayed flat rather than declining.
• Collection efficiency dipped to 97.1% from 98.5% in Q2 FY24, a softening that management did not flag as a concern but that bears watching alongside the SMA improvement.
• Credit cost remains range-bound at 0.19% historically, including through COVID. Management attributes this to a secured lending model (99.8% secured, 82%+ collateralized), a middle-income customer focus, and branch-led sourcing. Guidance is to keep credit cost in a 0.15% to 0.25% band for the fiscal year.
• No NPA sales, negligible write-offs: the bank has never sold an NPA asset, and write-offs this quarter and historically are very small. Internal PCR policy is a minimum 50% overall, 100% for NPAs older than four years, and 100% for unsecured NPAs older than 12 months.
• MFI exposure reduced from ₹73.8 cr to ₹59.6 cr, with the bank watchful of macro factors and yet to decide on further reductions.

Munish Jain: "If you look into our credit history, we being as a model, we are a lender to the middle income group. And we have purposefully selected this particular segment, and we have demonstrated stable credit cost, which typically remain in the range of 0.1% to 0.3%, except one of the year when it cross 0.3% that is FY22."

Loan Book & Growth

• Full-year advances growth target of 22%+ reaffirmed, with H1 having delivered 9% growth. Management is confident the target will be met, with growth coming from existing branches set up before the IPO; new branches will become operational in Q3 and Q4.
• Disbursements fell 22% QoQ because some large corporate disbursements were deliberately front-loaded into Q1. H1 disbursement growth versus H1 last year was still 33%.
• CD ratio rose to 82.4% from 79.1% sequentially, and management aims to take it to the mid-to-high 80s. Historically, a 100 bps CD ratio increase improved NIM by about 5 bps.
• ATS growth came from two segments: MSME ticket size rose from ₹0.19 cr to ₹0.2 cr on post-COVID traction, and corporate/NBFC ticket size rose from ₹15.8 cr to ₹20.5 cr as growth capital allowed larger tranches to efficient NBFCs.
• The corporate book of ₹725 cr is entirely NBFC-based, spanning 40 to 42 NBFCs. The bank typically does not lend below BBB minus, and for clients up to BBB plus or below A minus it looks for FLDG. Growth is concentrated in the A minus to A plus band.
• Agri book grew only 3% by conscious choice: the bank is expanding outside Punjab, where Agriculture is concentrated, and is not focusing on Agriculture in new geographies. MSME and Mortgage grew 17%+.
• The other loan segment (a second or third hook product for existing customers) de-grew from ₹495 cr in March to ₹485 cr YTD, but grew during the quarter from ₹462 cr. Management says this is not stress, just customer need-driven.

Liability Franchise & Distribution

• Branch network reached 180, including expansion into Jammu and Kashmir during the quarter. The target is 200+ branches by FY25-end, with 7-10 expected in Q3 and the remainder in Q4.
• Geographic diversification is underway: the out-of-Punjab book grew from 16.03% to 19.07% of the total, while the Punjab book still grew 21% YoY. Newer states are showing good traction.
• Distribution income is a growing contributor: bancassurance income (life, general, other) rose from ₹7.12 cr to ₹11.55 cr. Management is working on increasing distribution partners and deepening client relationships to keep growing this share.
• Non-interest income is targeted at 1% to 1.1% of assets going forward, including the 0.12% penal charges contribution that was reclassified from interest income.

Risk & Portfolio Construction

• The bank identifies risk in two pockets: unsecured lending with ticket sizes up to ₹3 lakh on the Agriculture side, and consumption lending. Management says it is not in the risky Agri piece and its consumption lending (7% of book) is only a second hook to existing customers, not a first hook.
• 82%+ of the book is collateralized, excluding the corporate book which is 11% of the total. The three-product portfolio of MSME, Mortgage, and Agri will continue to hold 80% to 82% of the book.
• No stress is visible in any segment per management, though the answer was a general statement rather than a detailed segment-by-segment breakdown.

Munish Jain: "Our consumption lending which is 7% is typically to the existing customers not to the first hook. So, we are accordingly ring-fencing ourselves from this type of risk."

Guidance & Commitments

Key Metrics