Earnings call transcript: SBFC Finance Q2 2025 shows robust growth

SBFC Finance Ltd. reported robust Q2 2025 financial results, with Assets Under Management (AUM) growing 29% year-over-year to INR 9,938 crore and Profit After Tax (PAT) increasing 30% year-over-year to INR 109 crore, translating to a 14.09% Return on Average Tangible Equity. The company is proactively addressing a challenging credit environment by tightening underwriting criteria, which has reduced loan approval rates below 40% and led to a focus on higher-ticket MSME loans, while still targeting 5-7% quarter-on-quarter AUM growth and a 15% ROE. Management anticipates a potential 10-15 basis point increase in credit costs, partly due to ongoing stress in its Karnataka portfolio, which constitutes 12% of its exposure.

Analysis

SBFC Finance Ltd. reported robust Q2 2025 financial results, with Assets Under Management (AUM) growing 29% year-over-year to INR 9,938 crore and Profit After Tax (PAT) increasing 30% year-over-year to INR 109 crore. This performance translated into a strong 14.09% Return on Average Tangible Equity and a 9.05% Net Interest Margin, reflecting effective capitalization on market opportunities. The company's strategic focus on the MSME loan segment, which constitutes 82% of its AUM, has been a primary growth driver.

Despite a challenging credit environment, SBFC has proactively tightened its credit criteria, reducing loan approval rates below 40% and raising the minimum CIBIL score to 700, particularly for smaller ticket sizes under INR 7 lakhs. Management targets a 5-7% quarter-on-quarter AUM growth and aims to maintain a 15% Return on Equity, while planning to increase leverage from sub-2x to 3-4x. This cautious approach is balanced with continued branch network expansion of 20-25 branches annually.

Key headwinds include an anticipated 10-15 basis point increase in credit costs and persistent stress in specific portfolios, notably Karnataka, which accounts for 12% of the company's exposure. The 1+ DPD bucket has shown an upward trend over several quarters, though the velocity of new additions has recently slowed. Management acknowledges these risks, emphasizing that while yields compensate for elevated risk, they remain vigilant until asset quality fully stabilizes.

Key Decisions for Investors

• Investors should closely monitor SBFC's 1+ DPD trends and the impact of tightened credit criteria on future asset quality, especially given the acknowledged stress in the Karnataka portfolio.
• Assess whether the targeted 5-7% QoQ AUM growth and 15% ROE are achievable amidst tightened underwriting and potential credit cost increases, considering the trade-off between growth and asset quality.
• Observe the company's ability to sustain operating leverage improvements and its strategy to increase financial leverage from sub-2x to 3-4x, which could enhance ROE if asset quality remains managed.