Capital Small Finance Bank Ltd Q4 FY2026 Concall Summary

Key Takeaways

• NIM inflection has begun: Cost of deposits fell 11 bps QoQ to 5.75%, lifting NIM to 4.06%, and 53% of term deposits are due for repricing over the next two quarters, promising more meaningful expansion.
• Asset quality is improving, not just optically: GNPA improved 14 bps sequentially to 2.54%, but the real signal is SMA-1 and SMA-2 falling from 6.46% to 4.92%, pointing to a healthier forward pipeline.
• The NBFC-MFI overhang is cleared: Management booked the full provision hit in FY26, signed an OTS with one lender, and ran only recoveries in Q4, so the ₹5.49 cr residual net NPA carries no fresh baggage into FY27.
• Out-of-Punjab is scaling with better quality: The outside-Punjab book grew more than twice as fast as Punjab, now 24% of advances, and carries significantly lower NPAs and SMAs even after excluding agriculture.
• What to watch next quarter: Whether the promised NIM lift from deposit repricing materialises in Q1, the pace of agriculture NPA recovery as cash flows return, and any early traction in the new BC lending channel.

Margin & Funding Cost

• Deposit cost turning: Cost of deposits declined to 5.75% from 5.86% QoQ as repricing at maturity began; 53% of the term deposit book is high-priced and maturing in Q1 and Q2 FY27, so the benefit will accrue more meaningfully over the next 3 to 6 months.
• NIM trajectory: NIM improved to 4.06% from 4.01% QoQ, driven entirely by the funding-cost side; management expects better NIM in Q1 and a more meaningful step-up in Q2 as the repricing tailwind compounds and the CD ratio improves.
• Yield headwinds are partly transient: The 25 bps rate cut in January shaved 10-12 bps off yield permanently, but another 7-8 bps came from interest reversals on agriculture accounts turning NPA, a drag that reverses as recoveries flow in Q1 and Q3.
• NII growth lagged loan growth modestly: NII grew 19% YoY against ~20% loan growth; the QoQ NII increase was only ~₹3 cr because agriculture NPA interest reversals of ₹1-2 cr weighed on the quarter.

Munish Jain: "initial understanding, it will not be P&L negative. So we will be either P&L neutral or P&L positive with this ECL."

Asset Quality & Credit

• Headline improvement: GNPA fell 14 bps sequentially to 2.54%, NNPA improved to 1.24% from 1.35%, and PCR was voluntarily raised to 51.89% from 50.45%, making the clean-up provisioning-driven rather than loss-driven.
• Early-warning pipeline is shrinking: SMA-1 and SMA-2 combined dropped to 4.92% from 6.46% a quarter back, supported by proactive collections and early delinquency management.
• Slippage contained: Gross slippage was 1.27% for Q4, but net slippage was just 0.08%, and write-offs were almost nil.
• Agriculture NPA is sticky by design: Agriculture GNPA held at 2.75-2.76%; Q4 is not a recovery quarter for agriculture because cash flows arrive in Q1 and Q3, so the majority of recovery is still ahead and the pattern is consistent with historical trends.
• The portfolio has never taken a write-off in agriculture: Over 26 years, the bank has not written off a single agriculture loan; the NPA stock is cumulative and remains under active recovery effort, with no political-sensitivity exposure because the bank lends in the ₹5 lakh to ₹25 lakh ticket segment, above small and marginal farmer thresholds.
• NBFC-MFI resolved: No fresh lending was done in Q4, only recoveries; an OTS was signed with one lender; management stated the pain that surfaced in Q1 is fully provided for in FY26 and no baggage carries into FY27, with residual net NPA at ₹5.49 cr.
• Credit cost guidance: FY27 credit cost is guided at 0.15% to 0.25% with a negative bias, and management is confident of holding this range; the FY26 credit cost of 0.26% was driven by the out-of-turn NBFC-MFI slippage and the discretionary PCR increase.

Munish Jain: "I strongly believe the pain which was there in this NBFC-MFI segment which has come in Q1 is fully provided for in the current year, and we are not carrying any baggage in the next year."

Growth & Franchise Expansion

• Loan growth on track: Gross advances reached ₹8,687 crores, up 21% YoY, driven by MSME, mortgage and agriculture; the portfolio is 98% secured with an average ticket size of ₹18.3 lakhs.
• Geographic rebalancing is working: Advances outside Punjab grew more than twice the Punjab growth rate YoY, lifting the outside-Punjab share to 24% from 21% a year back; out-of-Punjab branches at 5+ years average ₹73 crores business per branch versus ₹106 crores in Punjab, and carry significantly lower NPAs and SMAs even excluding agriculture.
• Branch expansion plan: The network reached 211 branches across 5 states and 2 union territories; the target is 235 by end-FY27 and 300-plus by FY29, with 50% of new branches opening outside Punjab and 40-45% inside Punjab to balance P&L benefit and growth.
• Haryana is the next anchor: Management has already sensitised the majority of Haryana and begun opening unbanked rural branches there; the internal ambition is to make Haryana the next Punjab.
• Agriculture growth has resumed: After a slowdown driven by ground-level events that were resolved last year, agriculture growth rebounded in Q4; going forward, agriculture will grow but slower than the overall book, with MSME and LAP as the growth leaders.
• BC lending channel launched: A business correspondent model, not co-lending, where the originator bears credit risk with 5% FLDG cash collateral per regulatory guidance; activity started this quarter with more than one partner, but management intends over 90-95% of disbursements to remain branch-driven, treating BC as an add-on.

Munish Jain: "We internally call we want to make Haryana our next Punjab. So that is our internal wording which we typically use."

Profitability & Operating Efficiency

• Earnings momentum: PAT of ₹40 crores grew 17% YoY; PPOP of ₹62 crores grew 28%; operating margin improved to 2.1% from 1.9%; ROA improved to 1.33% from 1.16% QoQ.
• Cost-to-income inflection: The ratio improved to ~58.9-59% in Q4 from 61% for the full year, because middle management, senior management and head office costs are already fully loaded; for FY27 branch expansion, only last-mile branch-level cost is required, enabling slight cost optimisation in FY27 and larger optimisation as scale builds.
• Opex trajectory: Q4 opex excluding labour was ₹89 crores versus ₹86 crores in Q3, with no significant decline or one-off items; FY27 opex is guided at 2.9% to 3% of average assets with a lower bias, and the medium-term target is below 2.85%.
• Fee income softness is partly structural, partly cyclical: The weakness came from reduced treasury income due to lack of opportunity; advance-related fee income grew ₹3 crores, operations-related fees were static, and banca commission dipped slightly.
• Fee income ambition: Management targets fee income as a percentage of average assets to improve from the current level to 0.95% in FY27, within a range of 0.85% to 0.95% with an upward bias; the composition is expected at ~33% banca and ~66% non-banca, with 35-40% of non-banca from advances and the rest operations-related.
• Banca product roadmap: The bank intends to add one more banca product in FY27 and another in the following year, with the medium-to-long-term vision of becoming the complete financial-product provider for its customers.

Munish Jain: "Only the periphery, that is the last mile cost at the branch is being required, which is giving us the confidence that we can look forward for some cost optimization, slight cost optimization in FY '27 and very larger cost optimization as we move forward with the scale increase."

Portfolio Resilience & Underwriting Model

• Agriculture portfolio stress-tested by floods: Despite flooding in Punjab during FY26, SMA numbers, net NPA, gross NPA and write-off figures show no significant stress; the operating model relies on diversified-income progressive farmers cultivating three crops a year, LTV below 50%, and full-fledged relationship banking.
• No write-off culture in agriculture: The bank has not written off anything from the agriculture portfolio over 26 years; the NPA stock is cumulative and remains under active recovery, not written off.
• Underwriting is data-driven, not relationship-dependent: The majority of lending is information-based, supplemented by relationship input; the model is identical outside Punjab, with the only difference being that one CCH handles 7 branches in Punjab versus 4 outside Punjab, reflecting a deliberate investment in credit oversight for newer geographies.
• Ticket-size positioning insulates from political risk: Lending in the ₹5 lakh to ₹25 lakh segment sits above the small and marginal farmer bracket, avoiding the politically sensitive segment.

Munish Jain: "We have not written off anything from the agriculture portfolio over the last 26 years. The number of NPA which you are seeing is a cumulative and that value is what we are not able to recover even if we and not write-off. It is fully with recovery effort only."

Guidance & Commitments

Key Metrics