SBFC Finance Q2 FY26 slides show 30% profit growth, focus on secured MSME loans

SBFC Finance Ltd (BSE:SBFC) reported robust Q2 FY26 results, with Assets Under Management (AUM) expanding 29% year-over-year to ₹9,938 crore and profit after tax (PAT) rising 30% to ₹109 crore. The non-banking financial company, specializing in secured MSME lending, maintained stable asset quality with a 2.77% gross NPA ratio and improved operational efficiency, while management outlined a cautious growth strategy prioritizing credit quality over volume, aiming for a 15% Return on Equity and continued branch network expansion.

Analysis

SBFC Finance reported robust Q2 FY26 results, with Assets Under Management (AUM) growing 29% year-over-year to ₹9,938 crore and profit after tax (PAT) increasing 30% to ₹109 crore. Operational efficiency improved, evidenced by a 20 basis point year-over-year decline in the operating expense to average AUM ratio to 4.40% and a significant 68 bps improvement in spread to 9.05%. Return on Average Tangible Equity also saw a substantial increase of 142 basis points to 14.09%, reflecting enhanced profitability.

The company maintained stable asset quality with a gross NPA ratio of 2.77%, showing a slight 1 basis point quarter-over-quarter improvement, despite operating in the high-growth secured MSME lending segment. SBFC's focus on the ₹5 lakh to ₹30 lakh ticket size within the MSME market, which is growing at a 24.4% CAGR, underpins its consistent AUM growth of 6% QoQ, aligning with management's 5-7% quarterly guidance. This growth is supported by a diversified pan-India presence across 220 branches and a tested underwriting framework.

Management emphasized a cautious growth approach, prioritizing credit quality over volume, as indicated by tightened credit criteria resulting in approval rates below 40%. Strategic initiatives include continued branch expansion (20-25 annually) and a target of 15% Return on Equity, alongside a gradual increase in leverage from sub-2x to 3-4x. While anticipating a slight 10-15 basis point increase in credit costs, the company's strong risk management framework is expected to mitigate potential challenges.

Key Decisions for Investors

• Investors should monitor the company's asset quality and credit cost trends, especially as management plans to gradually increase leverage and anticipates a slight rise in credit costs.
• Evaluate the balance between SBFC's cautious growth strategy, evidenced by tightened credit criteria, and its ability to sustain AUM growth within the targeted 5-7% quarterly range.
• Assess the long-term implications of the targeted 15% Return on Equity and the planned increase in leverage on shareholder returns and overall financial stability.