The quarter's performance reveals a troubling narrative for Suryoday Small Finance Bank, where deteriorating asset quality metrics have emerged as the defining concern. Gross non-performing assets surged to 5.93% in Q2 FY26, nearly doubling from 3.03% a year earlier and representing a significant deterioration from the 2.84% recorded in June 2024. Net NPAs climbed to 3.80%, up sharply from just 0.80% in September 2024, signalling accelerating stress in the loan portfolio. The provision coverage ratio plummeted to 35.40% in June 2025 from 83.90% a year prior, indicating reduced buffer against potential loan losses.
Total income for the quarter stood at ₹599.50 crores, declining marginally by 0.72% quarter-on-quarter but growing 8.09% year-on-year. Interest earned reached ₹519.66 crores, up 5.11% QoQ and 2.46% YoY, demonstrating resilient core lending operations. However, operating profit before provisions contracted to ₹79.15 crores from ₹108.92 crores in the previous quarter, reflecting higher operating expenses and declining other income. Provisions and contingencies stood at ₹39.85 crores, down from ₹62.09 crores in Q1 FY26 but substantially elevated compared to normalised levels, constraining bottom-line profitability.
| Quarter | Interest Earned (₹ Cr) | Net Interest Income (₹ Cr) | Net Profit (₹ Cr) | Gross NPA (%) |
|---|---|---|---|---|
| Sep'25 | 519.66 | 258.21 | 30.41 | 5.93% |
| Jun'25 | 495.17 | 247.14 | 35.28 | 8.46% |
| Mar'25 | 470.58 | 244.66 | -33.78 | 7.16% |
| Dec'24 | 487.85 | 268.27 | 33.30 | 5.53% |
| Sep'24 | 507.20 | 299.98 | 45.39 | 3.03% |
| Jun'24 | 488.12 | 293.23 | 70.06 | 2.84% |
| Mar'24 | 444.66 | 270.78 | 60.84 | 2.94% |
Financial Performance: Margin Compression Amidst Asset Quality Stress
Suryoday Small Finance Bank's financial performance in Q2 FY26 reflects the challenging balance between maintaining growth and managing asset quality deterioration. Interest earned of ₹519.66 crores represented a 5.11% sequential increase, driven by a growing loan book and sustained lending activity. However, interest expended surged to ₹261.45 crores, up 5.41% QoQ and 26.18% YoY, reflecting higher funding costs in a competitive deposit market. This resulted in net interest income of ₹258.21 crores, growing just 4.48% quarter-on-quarter but declining 13.92% year-on-year, highlighting significant margin pressure.
The bank's net interest margin compression remains a critical concern. Whilst specific NIM data for Q2 FY26 was unavailable, the June 2025 quarter recorded a NIM of 7.20%, down from 10.00% a year earlier. This 280 basis point contraction reflects both elevated funding costs and potential yield pressure on advances. Operating profit before provisions of ₹79.15 crores declined 27.35% QoQ, squeezed by the twin pressures of margin compression and elevated operating expenses. The bank's cost-to-income ratio averaged 65.81% historically, indicating substantial operational inefficiency that limits profitability potential.
Profit before tax stood at ₹39.30 crores in Q2 FY26, declining 16.08% quarter-on-quarter but recovering from the loss of ₹46.78 crores reported in March 2025. Tax expenses of ₹8.89 crores represented an effective tax rate of 22.62%, resulting in net profit of ₹30.41 crores. On a nine-month basis for FY26, the bank reported net profit of ₹102.25 crores, declining 31.26% compared to the corresponding period of the previous fiscal year, underscoring the sustained pressure on profitability. The quality of earnings remains questionable, with provisions consuming a substantial portion of operating profits and limiting the bank's ability to generate sustainable returns.
Asset Quality Crisis: The Defining Challenge
The deterioration in asset quality represents the most critical challenge confronting Suryoday Small Finance Bank. Gross NPAs of 5.93% in Q2 FY26 mark a near-doubling from 3.03% in September 2024, with the ratio having peaked at 8.46% in June 2025 before showing modest improvement. Net NPAs surged to 3.80%, up dramatically from just 0.47% in June 2024, indicating that the bank's provision buffer has eroded substantially. The provision coverage ratio of 35.40% as of June 2025 compares unfavourably to 83.90% a year earlier, suggesting inadequate provisioning relative to the stressed asset pool.
The advance-to-deposit ratio of 110.03% indicates aggressive lending relative to deposit mobilisation, potentially contributing to asset quality pressures. Whilst the bank maintained a robust capital adequacy ratio with Tier 1 CAR at 41.80%, well above regulatory requirements, the elevated NPA levels and declining provision coverage raise concerns about future capital deployment and profitability. The bank's advances stood at ₹9,974.35 crores as of March 2025, growing from ₹8,077.97 crores a year earlier, representing 23.47% annual growth. However, this growth has come at the cost of asset quality, with the loan book evidently containing pockets of stress.
Critical Asset Quality Concerns
Gross NPA Trajectory: Surged from 2.84% (Jun'24) to 8.46% (Jun'25) to 5.93% (Sep'25), indicating volatile and elevated credit stress.
Provision Coverage Collapse: Declined from 83.90% to 35.40% year-on-year, leaving the bank vulnerable to further deterioration.
Net NPA Spike: Jumped from 0.47% to 3.80% over 15 months, reflecting inadequate provisioning and rising credit costs.
The bank's return on assets of 0.39% and return on equity of 3.27% rank amongst the lowest in the small finance bank sector, reflecting both asset quality pressures and operational inefficiencies. The ROE of 3.27% is particularly concerning, indicating extremely poor capital efficiency and the bank's inability to generate adequate returns for shareholders. Deposits grew to ₹10,579.61 crores as of March 2025 from ₹7,777.27 crores a year earlier, representing 36.03% growth. However, the CASA ratio of 17.70% in June 2025, down from 20.10% in March 2024, indicates increasing reliance on costlier term deposits, further pressuring margins.
Industry Context: Underperforming the Small Finance Bank Sector
Suryoday Small Finance Bank's struggles stand in stark contrast to the broader performance of the small finance bank sector. The stock delivered a one-year return of just 5.58%, significantly underperforming the Other Bank sector's 15.81% return by 10.23 percentage points. Over three years, the stock returned 22.83%, lagging the Sensex's 35.77% gain by nearly 13 percentage points. The underperformance reflects investor concerns about the bank's deteriorating fundamentals and uncertain turnaround prospects.
The small finance bank sector has witnessed divergent performance trajectories, with stronger players like AU Small Finance Bank maintaining robust asset quality and profitability whilst weaker entities struggle with legacy portfolio issues. Suryoday's challenges appear structural rather than cyclical, stemming from underwriting weaknesses and potentially inadequate risk management frameworks. The bank's high beta of 1.50 indicates significantly higher volatility than the broader market, with the stock experiencing sharp swings in response to quarterly results and sectoral developments.
| Company | P/E Ratio (TTM) | Price to Book | ROE (%) | Gross NPA (%) |
|---|---|---|---|---|
| Suryoday Small Finance | 22.67x | 0.74x | 3.27% | 5.93% |
| AU Small Finance Bank | 32.37x | 4.13x | 12.75% | N/A |
| Ujjivan Small Finance | 28.84x | 1.93x | 6.69% | N/A |
| Equitas Small Finance | NA (Loss Making) | 1.36x | -1.56% | N/A |
| Jana Small Finance | 9.89x | 0.95x | 9.60% | N/A |
| Utkarsh Small Finance | NA (Loss Making) | 1.04x | -32.10% | N/A |
Peer Comparison: Valuation Discount Justified by Weak Fundamentals
Suryoday Small Finance Bank trades at a P/E ratio of 22.67x, below the small finance bank peer average, reflecting the market's assessment of its challenged fundamentals. The price-to-book ratio of 0.74x represents a substantial discount to peers, with AU Small Finance Bank trading at 4.13x and Ujjivan Small Finance at 1.93x. This valuation discount is entirely justified given Suryoday's ROE of just 3.27%, dramatically lower than AU Small Finance's 12.75% and Jana Small Finance's 9.60%.
The bank's market capitalisation of ₹1,477 crores positions it as the smallest amongst listed small finance banks, reflecting both its limited scale and investor scepticism. The lack of dividend yield, common amongst stressed banks conserving capital, further reduces investor appeal. Book value per share of ₹181.31 compares to the current market price of ₹139.10, indicating the stock trades at 0.77x book value. However, this apparent discount may prove illusory if further asset quality deterioration necessitates additional provisions that erode book value.
Valuation Perspective: Discount Trap or Value Opportunity?
Suryoday Small Finance Bank's 0.74x price-to-book ratio might appear attractive on the surface, but the valuation discount is fully warranted by the bank's weak fundamentals. With ROE at just 3.27%, gross NPAs at 5.93%, and provision coverage at a concerning 35.40%, the bank trades below book value for good reason. The market is pricing in the risk of further asset quality deterioration and the potential for additional capital requirements to strengthen provisioning buffers.
Shareholding Pattern: Institutional Caution Evident
The shareholding pattern reveals institutional caution regarding Suryoday Small Finance Bank's prospects. Promoter holding remained stable at 22.44% in September 2025, unchanged from June 2025 but marginally higher than 22.30% in December 2024. Foreign institutional investor holdings stood at 4.66%, declining slightly from 4.68% in the previous quarter and down from 4.80% in December 2024, indicating modest FII selling pressure.
Mutual fund holdings increased to 1.05% in September 2025 from just 0.49% in June 2025, suggesting some domestic institutional interest. However, this remains substantially below the 1.15% holding in September 2024, indicating that mutual funds have been net sellers over the past year. Insurance company holdings declined to 5.19% from 5.62% in March 2025 and 6.27% in September 2024, reflecting sustained institutional exit. The high non-institutional holding of 66.28% indicates a retail-heavy shareholder base, which can contribute to higher volatility during periods of stress.
| Investor Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 22.44% | 22.44% | 22.44% | 0.00% |
| FII | 4.66% | 4.68% | 4.67% | -0.02% |
| Mutual Funds | 1.05% | 0.49% | 0.04% | +0.56% |
| Insurance | 5.19% | 5.19% | 5.62% | 0.00% |
| Other DII | 0.38% | 0.25% | 0.00% | +0.13% |
| Non-Institutional | 66.28% | 66.96% | 67.23% | -0.68% |
Stock Performance: Persistent Underperformance Across Timeframes
Suryoday Small Finance Bank's stock performance reflects investor disappointment with the bank's deteriorating fundamentals. The stock delivered a one-year return of 5.58%, underperforming the Sensex's 7.73% gain with negative alpha of 2.15 percentage points. Over three months, the stock declined 7.91% compared to the Sensex's 2.51% decline, generating negative alpha of 5.40 percentage points. The six-month return of 0.69% marginally outperformed the Sensex's 0.15%, but this modest outperformance provides little comfort given the broader underperformance trend.
The stock's two-year return of negative 18.08% stands in stark contrast to the Sensex's positive 15.24% return, resulting in negative alpha of 33.32 percentage points. This substantial underperformance reflects the market's growing concerns about asset quality deterioration and the bank's ability to navigate its challenges. The stock traded at ₹139.10 as of January 22, 2026, approximately 13.60% below its 52-week high of ₹161.00 but 54.56% above its 52-week low of ₹90.00, indicating significant volatility.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -1.31% | -1.29% | -0.02% |
| 1 Month | +3.38% | -3.81% | +7.19% |
| 3 Months | -7.91% | -2.51% | -5.40% |
| 6 Months | +0.69% | +0.15% | +0.54% |
| 1 Year | +5.58% | +7.73% | -2.15% |
| 2 Years | -18.08% | +15.24% | -33.32% |
| 3 Years | +22.83% | +35.77% | -12.94% |
Technical indicators present a mixed picture. The stock currently trades in a sideways trend, having shifted from mildly bullish on January 20, 2026. Moving average indicators show the stock trading below key levels including the 5-day, 20-day, 50-day, 100-day, and 200-day moving averages, suggesting weak momentum. The stock's high volatility of 41.07% over the past year, combined with a beta of 1.50, indicates substantial price swings that may not suit risk-averse investors. The risk-adjusted return of 0.14 compares unfavourably to the Sensex's 0.69, highlighting the poor reward-to-risk profile.
Investment Thesis: Turnaround Uncertain, Risks Elevated
The investment thesis for Suryoday Small Finance Bank hinges entirely on the bank's ability to arrest asset quality deterioration and restore profitability. The current Mojo score of 48/100 with a SELL rating reflects the challenging fundamental backdrop. The financial trend is classified as "Positive" based on December 2025 data, but this appears optimistic given the sustained pressure on asset quality and profitability visible in September 2025 quarterly results. The technical trend of "Sideways" indicates lack of directional conviction amongst market participants.
The bank's quality grade of "Average" reflects its mixed long-term financial performance, whilst the valuation assessment of "Fair" at 0.74x price-to-book suggests the market has already priced in significant risks. However, the combination of elevated NPAs, weak provision coverage, compressed margins, and low return ratios creates a challenging backdrop for any meaningful re-rating. The bank requires substantial improvement across multiple parameters—asset quality stabilisation, margin recovery, and operational efficiency gains—before it can be considered an attractive investment proposition.
"With gross NPAs at 5.93%, provision coverage at just 35.40%, and ROE languishing at 3.27%, Suryoday Small Finance Bank faces a multi-year turnaround challenge that requires flawless execution and favourable external conditions."
Key Strengths & Risk Factors
KEY STRENGTHS
- Robust Capital Position: Tier 1 CAR of 41.80% provides substantial buffer above regulatory requirements, enabling continued lending growth.
- Deposit Growth Momentum: Deposits grew 36.03% year-on-year to ₹10,579.61 crores, demonstrating strong franchise expansion.
- Valuation Discount: Trading at 0.74x price-to-book ratio offers potential upside if turnaround materialises successfully.
- Advance Growth: Loan book expanded 23.47% annually, indicating continued business momentum despite challenges.
- Recovery from Loss: Returned to profitability after Q4 FY25 loss of ₹33.78 crores, showing resilience.
KEY CONCERNS
- Deteriorating Asset Quality: Gross NPAs nearly doubled to 5.93% from 3.03% year-on-year, with net NPAs surging to 3.80%.
- Inadequate Provisioning: Provision coverage ratio collapsed to 35.40% from 83.90%, leaving bank vulnerable to further stress.
- Margin Compression: NIM declined 280 basis points to 7.20% year-on-year, severely impacting profitability.
- Weak Return Profile: ROE of 3.27% and ROA of 0.39% rank amongst sector's lowest, indicating poor capital efficiency.
- High Cost Structure: Cost-to-income ratio of 65.81% reflects operational inefficiency limiting profit potential.
- Declining CASA: CASA ratio fell to 17.70% from 20.10%, increasing funding costs and margin pressure.
- Persistent Underperformance: Two-year return of negative 18.08% versus Sensex's positive 15.24% reflects investor disappointment.
Outlook: Critical Monitoring Points Ahead
The outlook for Suryoday Small Finance Bank remains clouded by asset quality uncertainties and the challenging task of restoring profitability whilst maintaining growth. The bank's ability to stabilise gross NPAs below 6% and rebuild provision coverage above 50% will be critical markers of progress. Equally important will be the trajectory of net interest margins, which need to stabilise above 7.50% to ensure sustainable profitability. Investors should closely monitor quarterly asset quality trends, provision requirements, and the bank's success in improving operational efficiency.
POSITIVE CATALYSTS
- Gross NPA ratio stabilising below 6% for two consecutive quarters
- Provision coverage ratio improving above 50% level
- Net interest margin recovery above 8% demonstrating pricing power
- ROE improvement above 5% indicating better capital efficiency
- CASA ratio recovery above 20% reducing funding costs
RED FLAGS
- Gross NPAs rising above 7% indicating uncontrolled deterioration
- Provision coverage falling below 30% creating capital adequacy concerns
- Net interest margin declining below 7% threatening viability
- Quarterly losses or profit decline exceeding 20% QoQ
- Further institutional selling or promoter stake reduction
The Verdict: Avoid Until Turnaround Evidence Emerges
Score: 48/100
For Fresh Investors: Avoid initiating positions until clear evidence of asset quality stabilisation and margin recovery emerges. The bank faces a multi-quarter turnaround challenge with elevated execution risks.
For Existing Holders: Consider reducing positions on any technical bounce towards ₹145-150 levels. The risk-reward profile remains unfavourable given deteriorating fundamentals and uncertain turnaround timeline.
Fair Value Estimate: ₹125 (10% downside from current levels), reflecting elevated asset quality risks and compressed profitability.
Rationale: Suryoday Small Finance Bank's deteriorating asset quality metrics, compressed margins, and weak return profile create a challenging investment proposition. With gross NPAs at 5.93%, provision coverage at just 35.40%, ROE at 3.27%, and persistent underperformance versus peers, the bank requires substantial fundamental improvement before warranting investment consideration. The valuation discount appears justified rather than attractive, given the elevated risks and uncertain turnaround trajectory.
Note— ROCE = (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ 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.
