Capital Small Finance Bank Ltd Q2 FY2026 Concall Summary

Key Takeaways

• NIM bottomed, recovery promised: NIM compressed to 4.04% as rate cuts fully hit advances while deposit repricing lags, but management expects a climb back to 4.1% by Q4 and toward 4.3% in subsequent years.
• Floods tested the book, asset quality held: GNPA improved 5 bps to 2.70% despite floods affecting 25–35% of Punjab geographies, validating the bank’s underwriting and borrower land diversification.
• Growth engine stays at 20%+: Disbursements rose 36% YoY, out-of-Punjab advances grew at twice the bank average, and management reaffirmed its 20%+ loan growth target for FY26.
• A new partnership-led lending model launches now: The bank will originate secured loans through NBFC partners under FLDG in thin-presence states, targeting 10–15% of annual disbursements over time.
• What to watch next quarter: Whether NIM begins its promised uptick as deposit repricing starts to flow, the pace of slippage in the NBFC MFI pool, and early traction in the partnership lending book.

Margin Trajectory & Rate Sensitivity

• The compression mechanics: The full impact of the 100 bps RBI rate cut has already transmitted to the advance portfolio, while the benefit of deposit repricing is yet to come because the average term-deposit maturity runs 12–15 months.
• Recovery path: Management expects NIM to improve to the Q4 FY25 level of 4.1% in H2, with the CRR cut adding support, and then to expand toward 4.2–4.3% in FY27 and beyond as deposit costs decline on a larger base.
• Fixed-rate shield built: The fixed-rate book has been raised from 39% to 48% of the total portfolio, and the housing loan book was consciously shrunk from 14–15% to 10–12% to limit sensitivity to future rate moves.
• MCLR cushion: MCLR-linked loans, at 39–40% of the portfolio, have already repriced downward with past rate cuts, so a further 25 bps RBI cut would have a muted margin impact.
• Cost of deposit benefit: Only 5–10 bps of funding-cost relief is expected in H2; the larger benefit lands in FY27 when deposit repricing flows across a bigger base.

Munish Jain: "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."

Asset Quality: Flood Test & Portfolio Resilience

• Floods hit, GNPA still fell: Floods in Punjab affected three to four districts (Firozpur, Gurdaspur, Tarn Taran, parts of Amritsar and Patiala), covering 25–35% of the bank’s Punjab geographies, yet GNPA improved 5 bps QoQ to 2.70% with zero write-offs.
• Why the impact was muted: Lending to riverside geographies is marginal, at lower single digits of the portfolio, and farmers typically hold two types of land, one near the riverbed and one away, providing natural diversification.
• Slippages and upgrades both moved the right way: The slippage ratio improved from 1.9% in Q1 to 1.84% in Q2, while the upgrade ratio nearly doubled from 0.76% to 1.2%.
• SMA pool shrank: SMA 1 and 2 improved sizably during the quarter, reinforcing the direction of the GNPA print.
• NBFC MFI pool contained: The NBFC MFI portfolio was reduced from ₹72 crores to ₹62 crores, net NPA declined, and cash recoveries flowed in on NPA accounts; the 14% NPA in this pool arose from market challenges in the MFI segment over the last six months, with no new negative development in Q2.

Sarvjit Samra: "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, or particularly three to four districts within Punjab, our asset quality continues to remain strong."

Growth & Geographic Diversification

• Disbursement momentum: Fresh disbursements hit ₹805 crore in Q2, up 36% YoY, taking H1 FY26 disbursements to ₹1,671 crore, up 24%.
• Out-of-Punjab push: The out-of-Punjab advance portfolio now stands at 23% of the total book, with advance growth outside Punjab running at more than twice the overall bank growth rate on a YoY basis. Deposits outside Punjab grew at three times the overall deposit growth rate.
• Branch network crossing 200: The bank achieved the 200-branch milestone, with 28 more in the pipeline; Haryana will rise from 24 to 33 branches and Rajasthan from 4 to 9.
• Loan mix tilting toward MSME and secured: In Q2, MSME, LAP and agriculture growth outpaced corporate loan growth; the corporate book share remained static at 14%, with NBFC lending concentrated in secured products where 50% of the portfolio is A-rated and above.
• Deposit growth calibrated: Total deposits reached ₹9,317 crores, up 20% YoY, with growth deliberately calibrated given the bank’s low CD ratio and high leverage ratio; deposit mobilisation accelerated following rate cuts earlier in the year, growing 12% during H1.
• CASA dip called temporary: A marginal decline in outstanding CASA was attributed to emergent cash withdrawals after the floods and is not seen as a structural shift.

Partnership-Led Lending: The New Growth Leg

• Model structure: The bank has inked agreements with a few high-rated NBFCs to originate secured loans under the FLDG framework; loans sit on Capital Bank’s book, the NBFC sources and services, while the bank controls underwriting and takes security deposits from the NBFC for FLDG cover.
• Geographic logic: The model targets Rajasthan, Gujarat and parts of Madhya Pradesh, states where the bank has a thin branch presence, using the partner’s local origination reach while the bank retains underwriting and customer hygiene through technological integrations.
• Risk guards: Partner payouts are linked to portfolio quality, a fixed-percentage FLDG is taken for the first six months per bucket, and the bank is partnering only with NBFCs with whom it has long-standing on-lending relationships.
• Scaling ambition: The model starts at 4–5% of annual disbursements and is targeted to reach 10–15% of annual disbursements; management declined to give a timeline or to size it as a percentage of the total loan book.
• Regulatory boundary: Co-lending is not available to small finance banks under the current regulatory framework, so the FLDG partnership structure is the chosen path.

Munish Jain: "We are typically keeping a complete ring fencing and safeguarding to ensure the same and that will be purely in the operating geography where we have a thin presence, we have a limited presence out there."

Operating Efficiency & Profitability Bridge

• Opex ratio improving: Opex as a percentage of average assets improved to 3.0% from 3.3% in Q2 FY25, and the cost-to-income ratio stood at 61.7%.
• Why opex leverage works now: Systems, middle management and processes are already in place to support growth for the current year and the next year and a half, so incremental opex will be limited to branch-specific expenses rather than system-wide costs.
• ROA inched up: ROA improved to 1.3% in Q2 FY26 from 1.2% in Q1, with management targeting a 1.4% exit ROA for Q4 and further improvement from Q4 and FY27 onward.
• Profit growth lag explained: PAT grew only 5% despite 18% advance growth, a gap solely attributable to NIM compression from the 100 bps rate cut; as NIM recovers, profit growth should re-align with balance-sheet growth.
• Non-interest income held flat at 0.9% of total assets despite a complete absence of treasury earnings in Q2; core other income is of a permanent, sustainable nature, and earning opportunities in fixed income now appear to be returning.
• Medium-term opex target: The bank aims for 1.5x branch growth versus 2x business growth over the next 3–3.5 years, which would drive further improvement in the opex-to-assets ratio.

Munish Jain: "We believe that our opex, with a branch opening, the opex increase will be limited to the specific branch expenses that it expands rather than the cross the system expense."

Universal Bank Ambition & Long-Term Targets

• ROA bridge to FY29: Management targets 1.6%+ ROA by FY29, built from the current 1.3% through three levers: NIM expansion of at least 30 bps, opex improvement of 15–20 bps, and higher non-interest income, with a discount for credit cost of 20–30 bps and a 25% tax implication.
• NIM target: The bank is targeting a NIM of 4.3%+ with a CD ratio of 86–89%.
• Non-interest income ambition: The medium-term goal is to lift non-interest income from 0.9% to 1.0–1.1% of assets by adding products for the middle-income customer segment.
• Universal bank timeline: Management intends to apply for a universal bank license but declined to commit to a specific timeline, calling a five-year horizon “too premature” while stating the internal ambition is more aggressive.
• Advance book doubling: The bank plans to double its advance book over the next three to three and a half years, i.e. by FY29, and intends to accelerate the growth percentage each year.

Munish Jain: "I believe five years is a longer period. We internally are ambitious, more ambitious than this and want to achieve it earlier than this."

Guidance & Commitments

Key Metrics