The quarter's performance reflects the bank's ability to maintain earnings growth despite a challenging operating environment characterised by rising interest rates and competitive deposit mobilisation. Total income for Q2 FY26 reached ₹279.60 crores, up 3.57% from the previous quarter and 12.16% year-on-year, driven primarily by interest earned on advances which climbed to ₹202.90 crores. However, the stock has struggled to translate operational performance into market gains, trading at ₹285.65 as of October 29, 2025, down 0.47% over the past year and underperforming both the broader market and its peer group.
Financial Performance: Steady Growth Trajectory
Capital Small Finance Bank's Q2 FY26 results demonstrate consistent operational execution across key metrics. Interest earned grew 3.79% quarter-on-quarter to ₹256.46 crores, whilst interest expended increased 5.48% to ₹144.82 crores, reflecting the higher cost of funds in the current rate environment. Net interest income expanded to ₹111.64 crores, the highest level recorded by the bank, representing a 1.69% sequential increase and 10.62% year-on-year growth.
Operating profit before provisions stood at ₹50.67 crores, marginally down 1.32% from Q1 FY26's ₹51.35 crores, indicating some pressure on operational efficiency. Provisions and contingencies declined significantly to ₹4.30 crores from ₹8.84 crores in the previous quarter, providing a tailwind to bottom-line growth. Profit before tax reached ₹46.37 crores, up 9.08% quarter-on-quarter, whilst net profit of ₹34.89 crores marked the bank's strongest quarterly performance.
| Metric | Q2 FY26 | Q1 FY26 | Q4 FY25 | Q3 FY25 | QoQ Change | YoY Change |
|---|---|---|---|---|---|---|
| Interest Earned | ₹256.46 Cr | ₹247.08 Cr | ₹231.46 Cr | ₹234.97 Cr | +3.79% | +14.70% |
| Net Interest Income | ₹111.64 Cr | ₹109.79 Cr | ₹103.06 Cr | ₹107.12 Cr | +1.69% | +10.62% |
| Total Income | ₹279.60 Cr | ₹269.96 Cr | ₹257.03 Cr | ₹253.13 Cr | +3.57% | +12.16% |
| Net Profit | ₹34.89 Cr | ₹32.01 Cr | ₹34.24 Cr | ₹34.05 Cr | +9.00% | +4.65% |
On a half-yearly basis for H1 FY26, the bank posted net profit of ₹66.90 crores, up 6.63% from H1 FY25's ₹63.36 crores. Total income for the six-month period reached ₹549.56 crores, demonstrating sustained momentum in core banking operations. The bank's ability to maintain profitability growth despite elevated provisions and competitive pressures reflects robust underwriting standards and operational discipline.
Asset Quality: Persistent Challenge Requiring Attention
Whilst Capital Small Finance Bank has demonstrated strong profitability metrics, asset quality remains a key area of concern. The bank's gross NPA ratio stood at 2.74% in Q2 FY26, marginally higher than the 2.58% recorded in Q4 FY25, though showing improvement from the 2.76% level in Q4 FY24. Net NPAs remained at 1.39% in Q1 FY26, up from 1.30% in the previous quarter, indicating that credit costs continue to weigh on the balance sheet.
The bank's advances portfolio grew to ₹7,090.39 crores as of March 2025, representing a 16.71% increase from the previous year's ₹6,074.69 crores. This growth in the loan book, whilst positive for revenue generation, necessitates careful monitoring of asset quality metrics. The advance-to-deposit ratio stood at 78.47%, indicating efficient deployment of deposit resources, though the elevated NPA levels suggest some segments of the portfolio require closer attention.
⚠️ Asset Quality Monitoring Required
Capital Small Finance Bank's gross NPA ratio of 2.74% remains elevated compared to larger private sector banks, reflecting the inherent credit risks in serving underbanked segments. The sequential increase in net NPAs from 1.30% to 1.39% warrants close monitoring, particularly as the bank continues to expand its loan book. Management's ability to contain credit costs whilst pursuing growth will be critical for sustained profitability.
Deposits grew to ₹8,322.60 crores as of March 2025, up 11.30% year-on-year, providing adequate funding for the bank's growth ambitions. However, the CASA ratio declined to 35.90% in Q1 FY26 from 36.90% in Q4 FY25, suggesting some pressure on low-cost deposit mobilisation. This trend, if continued, could impact net interest margins in subsequent quarters as the bank may need to rely more heavily on higher-cost term deposits.
Profitability Metrics: Strong ROE Demonstrates Capital Efficiency
Capital Small Finance Bank's return on equity of 9.71% represents a key strength, indicating effective utilisation of shareholder capital. This metric compares favourably with several peers in the small finance bank segment and reflects the bank's ability to generate profits relative to its equity base of ₹1,340.14 crores as of March 2025. The bank's ROA of 1.20% also demonstrates reasonable asset productivity, though there remains scope for improvement as the bank scales operations.
The bank's net interest margin averaged 4.35% over recent periods, a healthy spread that provides a buffer against potential increases in credit costs. Operating profit to assets averaged 5.08%, indicating efficient cost management, though the cost-to-income ratio of 61.98% suggests opportunities for further operational leverage as the bank grows. The bank's ability to maintain these profitability metrics whilst managing asset quality will be crucial for long-term value creation.
✓ Capital Efficiency Strength
The bank's ROE of 9.71% represents strong capital efficiency, particularly for a small finance bank operating in underserved markets. This metric, combined with a debt-free balance sheet (zero debt-to-equity ratio), positions the bank well for sustainable growth. The bank's ability to generate returns above its cost of capital whilst maintaining conservative leverage demonstrates prudent financial management.
Peer Comparison: Valuation Discount Reflects Asset Quality Concerns
Capital Small Finance Bank trades at a significant valuation discount to its peer group, with a price-to-earnings ratio of 9.68x compared to peers like AU Small Finance Bank at 30.33x and Ujjivan Small Finance Bank at 24.27x. The bank's price-to-book value of 0.94x also lags the peer average of approximately 1.70x, reflecting market concerns around asset quality and growth sustainability.
| Bank | P/E Ratio | P/BV Ratio | ROE (%) | Div Yield (%) | Gross NPA (%) |
|---|---|---|---|---|---|
| Capital Small Finance | 9.68 | 0.94 | 9.71 | 1.40 | 2.74 |
| AU Small Finance Bank | 30.33 | 3.63 | 11.98 | 0.11 | N/A |
| Ujjivan Small Finance | 24.27 | 1.62 | 6.69 | N/A | N/A |
| Equitas Small Finance | NA (Loss Making) | 1.13 | -1.69 | N/A | N/A |
| Jana Small Finance | 11.46 | 1.10 | 9.60 | N/A | N/A |
| Utkarsh Small Finance | NA (Loss Making) | 1.22 | -11.87 | N/A | N/A |
The valuation discount appears justified when considering the bank's elevated gross NPA ratio relative to industry leaders. However, Capital Small Finance Bank's superior ROE compared to several peers (9.71% vs peer average of approximately 3% excluding AU Small Finance) and its dividend yield of 1.40% provide some compensation for investors willing to accept the asset quality risks. The bank's market capitalisation of ₹1,301 crores positions it as the smallest player in the peer group, potentially limiting institutional investor interest.
Valuation Analysis: Attractive Entry Point With Caveats
At the current price of ₹285.65, Capital Small Finance Bank trades at a price-to-book value of 0.94x, representing a discount to book value—an unusual situation for a profitable bank. The bank's P/E ratio of 9.68x appears attractive compared to historical trading multiples and peer valuations, suggesting the market has priced in significant concerns around asset quality and growth sustainability. The bank's PEG ratio of 0.50x indicates the stock may be undervalued relative to its growth prospects, though this metric should be interpreted cautiously given the asset quality challenges.
The bank's valuation grade has fluctuated significantly over the past year, moving from "Very Expensive" in April 2024 to "Very Attractive" currently. This volatility reflects changing market perceptions around the bank's growth trajectory and risk profile. The stock's 52-week range of ₹250.00 to ₹330.40 indicates substantial price volatility, with the current price 13.54% below the 52-week high, suggesting some technical weakness.
Valuation Dashboard
P/E Ratio: 9.68x (Discount to peers)
P/BV Ratio: 0.94x (Below book value)
Dividend Yield: 1.40% (₹4.00 per share)
Overall Assessment: Very Attractive valuation, but asset quality risks justify discount
Stock Performance: Underperformance Reflects Market Concerns
Capital Small Finance Bank's stock has significantly underperformed both the benchmark Sensex and its peer group over multiple timeframes. Over the past year, the stock declined 0.47% whilst the Sensex gained 5.76%, resulting in negative alpha of 6.23 percentage points. The underperformance is even more pronounced over three-month and six-month periods, with the stock down 7.23% and 1.91% respectively, compared to Sensex gains of 4.50% and 5.86%.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | +2.60% | +0.68% | +1.92% |
| 1 Month | +2.77% | +5.76% | -2.99% |
| 3 Months | -7.23% | +4.50% | -11.73% |
| 6 Months | -1.91% | +5.86% | -7.77% |
| Year-to-Date | -0.90% | +8.78% | -9.68% |
| 1 Year | -0.47% | +5.76% | -6.23% |
The stock's beta of 1.50 indicates higher volatility than the broader market, with a 29.97% annual volatility compared to the Sensex's 12.49%. This elevated volatility, combined with negative risk-adjusted returns, places the stock in the "Medium Risk Low Return" category—an unfavourable combination for most investors. The stock has also underperformed its sector benchmark, with the Other Bank index returning 11.69% over the past year compared to Capital Small Finance's decline of 0.47%, representing sector underperformance of 12.16 percentage points.
Technical Outlook: Mildly Bearish Trend Persists
From a technical perspective, Capital Small Finance Bank remains in a mildly bearish trend as of October 29, 2025, having shifted from a bearish trend on October 27. The stock trades below all major moving averages—5-day (₹283.52), 20-day (₹279.53), 50-day (₹286.76), 100-day (₹292.11), and 200-day (₹289.34)—indicating broad-based technical weakness. Key resistance levels exist at ₹279.53 (20-day moving average) and ₹292.11 (100-day moving average), whilst support is found at the 52-week low of ₹250.00.
Technical indicators present a mixed picture, with weekly MACD signalling bearish momentum, whilst the Dow Theory indicator shows mildly bullish signals on both weekly and monthly timeframes. On-Balance Volume (OBV) indicates mildly bullish accumulation on a weekly basis but turns mildly bearish on a monthly timeframe, suggesting uncertainty amongst market participants. Delivery volumes have increased 38.69% over the past month, with recent delivery percentage of 79.12%, indicating some genuine investor interest despite the bearish technical setup.
Investment Thesis: Value Opportunity With Significant Risks
Capital Small Finance Bank presents a complex investment proposition characterised by attractive valuations offset by persistent asset quality concerns and technical weakness. The bank's proprietary Mojo score of 52 out of 100 places it firmly in "HOLD" territory, reflecting the balanced nature of positives and negatives. The bank scores well on valuation (Very Attractive grade) but faces challenges from its mildly bearish technical trend and average quality assessment.
Mojo 4 Dots Analysis
Near-Term Drivers: Mixed (Positive financial trend ✓ | Mildly bearish technicals ✗)
Quality Grade: Average (Consistent profitability but elevated NPAs)
Valuation: Very Attractive ✓ (Trading below book value with low P/E)
Overall Assessment: Mixed signals—value opportunity with execution risks
Key Strengths
- Strong ROE of 9.71%: Demonstrates efficient capital utilisation and profitability relative to equity base, comparing favourably with small finance bank peers
- Consistent Profit Growth: Net profit reached all-time high of ₹34.89 crores in Q2 FY26, with sustained QoQ and YoY growth momentum
- Attractive Valuation: Trading at 0.94x P/BV and 9.68x P/E represents significant discount to peers and book value
- Healthy NIM: Net interest margin of 4.35% provides adequate buffer for credit costs and supports profitability
- Dividend Yield: 1.40% dividend yield provides income component whilst waiting for capital appreciation
- Debt-Free Balance Sheet: Zero debt-to-equity ratio provides financial flexibility and reduces refinancing risks
- Growing Deposit Base: Deposits increased 11.30% YoY to ₹8,322.60 crores, providing stable funding for growth
Key Concerns
- Elevated Gross NPAs: 2.74% gross NPA ratio remains concerning and limits valuation re-rating potential
- Rising Net NPAs: Sequential increase from 1.30% to 1.39% indicates deteriorating asset quality trends requiring immediate attention
- Declining CASA Ratio: Drop from 36.90% to 35.90% suggests pressure on low-cost deposits, potentially impacting NIMs
- Technical Weakness: Mildly bearish trend with stock trading below all major moving averages indicates lack of buying interest
- Consistent Underperformance: Negative alpha across all timeframes reflects market scepticism about growth prospects
- High Beta: 1.50 beta indicates elevated volatility, unsuitable for risk-averse investors
- Small Market Cap: ₹1,301 crore market cap limits institutional participation and liquidity
Outlook: What to Watch
Positive Catalysts
- Asset Quality Stabilisation: Any signs of NPA ratio declining or stabilising would trigger valuation re-rating
- CASA Ratio Improvement: Recovery in low-cost deposit mix would support margin expansion
- Continued Profit Growth: Sustained quarterly profit momentum above ₹35 crores would build investor confidence
- Technical Breakout: Move above ₹292 (100-DMA) could trigger momentum-based buying
- Sector Tailwinds: Regulatory support for financial inclusion could benefit small finance banks
Red Flags to Monitor
- Further NPA Deterioration: Any increase in gross or net NPAs beyond current levels would be highly negative
- Margin Compression: Decline in NIM below 4% would pressure profitability significantly
- Rising Provisions: Sustained increase in credit costs would erode bottom-line growth
- Deposit Growth Slowdown: Inability to mobilise deposits would constrain loan book expansion
- Technical Breakdown: Fall below ₹250 (52-week low) would signal deeper correction ahead
"Capital Small Finance Bank offers value investors an intriguing proposition—a profitable bank trading below book value with reasonable growth prospects, but only for those willing to accept elevated asset quality risks and potential near-term volatility."
Investment Verdict
Score: 52/100
For Fresh Investors: Not recommended for immediate purchase. Whilst the valuation appears attractive at 0.94x P/BV and 9.68x P/E, the elevated gross NPA ratio of 2.74% and mildly bearish technical trend suggest waiting for clearer signs of asset quality stabilisation. Value investors with high risk tolerance may consider building positions gradually on further weakness towards ₹250-260 levels.
For Existing Holders: Continue to hold with close monitoring of asset quality metrics. The bank's strong ROE of 9.71%, consistent profit growth, and attractive dividend yield of 1.40% justify holding positions. However, set a stop-loss mentally at ₹250 (52-week low) and consider reducing exposure if gross NPAs trend above 3% or net NPAs exceed 1.50% in coming quarters.
Fair Value Estimate: ₹320-340 (12-19% upside from current levels), contingent upon asset quality stabilisation and sustained profit growth. The valuation assumes gross NPAs stabilise around 2.50-2.75% and the bank maintains ROE above 9%.
⚠️ Investment Disclaimer: This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
