AUBANKNSEJanuary 19, 2023

AU Small Finance Bank Limited

10,276words
120turns
16analyst exchanges
8executives
Management on call
Sanjay Agarwal
MANAGING DIRECTOR AND
Uttam Tibrewal
EXECUTIVE DIRECTOR – AU SMALL FINANCE BANK LIMITED
Yogesh Jain
CHIEF OF STAFF - AU SMALL FINANCE BANK LIMITED
Vimal Jain
CHIEF FINANCIAL OFFICER - AU SMALL FINANCE BANK LIMITED
Rishi Dhariwal
GROUP HEAD LIABILITIES – AU SMALL FINANCE BANK LIMITED
Bhaskar Karkera
CHIEF OF WHEELS – AU SMALL FINANCE BANK LIMITED
Prince Tiwari
HEAD OF FIG & INVESTOR
Aseem Pant
VICE PRESIDENT INVESTOR
Key numbers — 40 extracted
6.8%
arter. Despite these headwinds, India emerges as a bright spot with GDP expected to grow north of 6.8% this fiscal as per the latest RBI forecast. The effects of series of rate hikes
rs,
novations like India Stack, coupled with these structural reforms implemented in the last five years, are helping us emerge as a knowledge and technology leader in the world. The governance structure
INR 393 crore
able quarter for us. I'm happy to share that we not only delivered the ever-highest net profit of INR 393 crores, but also performed well across all parameters. In line with our expansion strategy, we opened 4
38%
e've entered into two new states, Andhra Pradesh and Kerala in last quarter. Our deposits grew by 38% on yearly basis and 5% on quarterly basis, led by an increase in retail term deposits. Our overal
5%
w states, Andhra Pradesh and Kerala in last quarter. Our deposits grew by 38% on yearly basis and 5% on quarterly basis, led by an increase in retail term deposits. Our overall CASA plus retail term
70%
led by an increase in retail term deposits. Our overall CASA plus retail term deposits is around 70%. As the system credit growth continues to be strong, the competition for deposit has intensified
42%
ng-term interest rates on deposits. In the last quarter, our overall CASA moderated to 38% from 42%, but I strongly believe that it's still in the zone. Our cost of funds saw a 14 bps increase for
14 bps
ated to 38% from 42%, but I strongly believe that it's still in the zone. Our cost of funds saw a 14 bps increase for the quarter as compared to last quarter. As a systematic liquidity continues to be t
5.84%
e same time, our yearly cost of money continues to be in line with our earlier forecast at around 5.84%. We remain on course to deliver our margins for our current financial year in the line with FY'22
INR 10,000 crore
be it Wheels, SBL, Housing and Commercial Banking. The asset business saw a disbursement north of INR 10,000 crores, growing 23% year-on year with the disbursement yields remaining stable. Our non-fund business a
23%
and Commercial Banking. The asset business saw a disbursement north of INR 10,000 crores, growing 23% year-on year with the disbursement yields remaining stable. Our non-fund business also saw sancti
INR 500 crore
with the disbursement yields remaining stable. Our non-fund business also saw sanctions of around INR 500 crores. Our asset quality, which is one of our core strength, has remained resilient across cycles and
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Guidance — 20 items
Sanjay Agarwal
opening
“Despite these headwinds, India emerges as a bright spot with GDP expected to grow north of 6.8% this fiscal as per the latest RBI forecast.”
Sanjay Agarwal
opening
“At the same time, our yearly cost of money continues to be in line with our earlier forecast at around 5.84%.”
Sanjay Agarwal
opening
“Moreover, I strongly believe that cautious stance adopted by us around growth of neither aggressively building assets nor raising more money at higher rates over the last six months has served us well, and any impact of elevated cost on our margin of next year remains a key monitorable.”
Sanjay Agarwal
opening
“We look forward to her guidance in building our bank and take her inputs in the area of her specialization like sustainability and CSR.”
Uttam Tibrewal
opening
“One of the key target areas for us has been becoming the primary account for our customers, and we've continued to design, innovate, and launch savings and current account products to make this transition natural for our customers.”
Uttam Tibrewal
opening
“We are on the verge of launching another premium savings product, which in my mind, will be among the best in the industry.”
Uttam Tibrewal
opening
“The business momentum on the ground has been strong and we expect the credit demand to be robust in the current quarter.”
Uttam Tibrewal
opening
“I remain confident of our business model and execution capabilities and optimistic that we are well positioned that AU will deliver one of the best Q4.”
Prince Tiwari
qa
“And whatever is left over at the end of the annual financial year, basis the guidance from the board, we'll take a call in terms of what do we intend to do with the remaining contingencies.”
Sanjay Agarwal
qa
“And so there not be any further reduction, rather we are hiring extensively, and I think more hiring can be done for the basis of the next year business plan.”
Risks & concerns — 13 flagged
In terms of macro, you all know that global economic activity has been slowing down due to the adverse impact of geopolitical tensions, tightening global financial conditions, persistently high inflation and sharper than expected monetary tightening by central banks globally.
— Sanjay Agarwal
Moreover, India's favorable demographic, stable democratic set-up and increasing impact of technological innovations like India Stack, coupled with these structural reforms implemented in the last five years, are helping us emerge as a knowledge and technology leader in the world.
— Sanjay Agarwal
Moreover, I strongly believe that cautious stance adopted by us around growth of neither aggressively building assets nor raising more money at higher rates over the last six months has served us well, and any impact of elevated cost on our margin of next year remains a key monitorable.
— Sanjay Agarwal
To sum up, post the 225 bps increase in repo rate by RBI over the last three quarters and the increased competition for deposits necessitated by the strong credit offtake, the system-wide deposit interest rates saw significant pressure last quarter.
— Uttam Tibrewal
Very marginal decline, but any reason behind that?
— Nitin Aggarwal
And for next year, very difficult, we are also reading the market.
— Yogesh Jain
So it's difficult to comment as of now because once the overall scheme of things are settled down.
— Sanjay Agarwal
Sir, last quarter you sounded a bit cautious on growth front, I think that deposit cost has gone up.
— Nidhesh Jain
So although remain very cautious, but very optimistic.
— Sanjay Agarwal
So again, I would say, it's difficult to comment now because, again, it's an evolving story that what type of interest rate cycles we are all are expecting.
— Sanjay Agarwal
So we need to be very cautious and we should be very smart enough to figure out that what particular year, what kind of stream can work.
— Sanjay Agarwal
So while I understand that there was pressure on the rates, deposit rate, so have you seen any migration of the retail customers from CASA blocking in the long-term rate in the term deposits or some other trends that you have got in?
— Pallav Garg
So how should we look at this going forward, let's say, next two, three quarters in the time there is a pressure on deposit rates particularly?
— Pallav Garg
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Q&A — 16 exchanges
Q
Congrats on good set of numbers. Sir, the first question was, we have consumed contingent provisions during this quarter despite healthy asset quality trend and good profitability. So just wanted to understand thought process of consuming the same and not building the buffers? That's one. Second is, in the last two quarters, we are seeing a reduction in employee base. So what's happening there? And third is that, currently, what are the challenges in PSLC business? And also, why are we not tapping IBPC route in terms of selling down excess PSLs?
Prince Tiwari
This is Prince here. So, around the first question around contingencies, like as we have articulated earlier as well, that contingencies are precisely created for a particular purpose. And in this case, as you are aware that it was created for COVID and COVID-related contingencies. Of course, as things are getting normalized, we'll need to resolve those contingencies and we cannot keep on it forever. So, if you see, in the first quarter, we did utilized part of it to create floating provisions. And the balance, like whatever is around restructure that's getting used as and when the restructure
Q
Congratulations, Sanjayji and Uttamji on very good results. Two questions I have. One, if you look at Slide 14, the disbursement, and advances yield, they have [inaudible] over past one year from 3Q FY '22 to the current quarter. I understand that this can be because of the scaling of the housing business?
Prince Tiwari
Nitin, your voice is not very clear. Can you just repeat that part or maybe just come near to the mic.
Q
So I was saying like if you look at Slide 14, the disbursement and advances yield have hardly moved up over the past one year. I understand that this can be because of the -- we are scaling up the housing business. But given the extent of rate hike we have seen in the system, this still looks like a little surprising. So if you can share some color on this? And why the disbursement yield during the third quarter have gone down over the second quarter? Very marginal decline, but any reason behind that? And the second question is on the collection efficiency. Now we have been reporting for many
Sanjay Agarwal
Nitin, I am Sanjay this side. So I'll answer the second one. So I would say that the credit compliance of the culture, I already commented in my speech that it is one of the best time for us as a lender. People have become lot much conscious around even borrowing money. And the whole repaying their EMI on time has come to be some kind of discipline, some culturally, people have become more disciplined around it. And this I'm saying across products, across geographies, across buckets. So that is why the recovery percentage or the collection is north of 100%. And the business momentum we are see
Q
So if I understand clearly, your question on the first part had two parts. One was that the disbursement overall on a year-on-year basis looks flattish on an overall, what we have given on Slide No. 12.
Nitin Aggarwal
Yields have not gone anywhere year-on-year. And this quarter, the yields have come down on disbursement. These two parts? Sorry. Yields has not gone upwards year-on-year? From 12.7% to 13%. And this quarter it has moved from 13.1% to 13%. Nitin, actually for this quarter, this was active quarter. In October, it was Diwali festive. So because of that, in that particular month, you get business. So yield was slightly lesser than last quarter Q2. Nitin, the decline is only 5 bps. And that's also partly because the mix of the commercial banking has increased slightly. Our yields otherwise have hel
Q
Sir, my question was around the cost of funds. You have obviously made detailed disclosures on incremental and outstanding cost of funds and they've not moved much if you compare it to most other banks that have reported. More importantly, if you just calculate from balance sheet averages and cost of funds are risen much less than even what you've disclosed obviously because you disclose on daily balances. So how is it that relative to the system you've done much-much better on cost of funds despite hike in CDs? And what is the outlook for fourth quarter and longer term just in terms of cost o
Prince Tiwari
Mahrukh, first of all, we haven't done any CDs in this quarter, as we have disclosed. Our CDs have in fact been coming down. Now as far as the overall cost of funds is concerned, you would agree that our cost of funds were quite high when we started the bank (Correction: year). It was around 5.95% unlike some of the larger peers that you are comparing us with. And we have benefited from some of the repricing on that book. Now of course, if you look at the incremental cost of fund, I think that has -- as we have disclosed, it's about 23 bps up in this quarter and that is in line with the broade
Q
Congratulations. Firstly, a follow-up on one of the previous questions. On the cost of funds front, has there been any rundown of any older higher cost borrowings on our book? And if yes, how long do you expect that to continue?
Yogesh Jain
So we don't have any grandfathered borrowing right. That has already been closed. This is now six years running. So three, four years, we had those grandfathered borrowings. So this is in normal course of business. And secondly, on the TD front, on the term deposits, there has been a decent traction on the retail as well as bulk TDs. They're up by 10% to 15% quarter-on-quarter. Can you share the blended cost of deposits on the bulk TD book? If you can answer this? We need to have blended cost of... Bulk TD book. So my bulk TD cost is around 6.4% in nine months for this year, means overall TD c
Q
Congrats on a good set numbers. So sir, my first question is on yields on the business banking side, which is the number almost...
Management
Q
So sir, my first question is on the business banking yield. So the yields on the business banking side has been up by 100 basis points. I understand that it's a floating rate book, but if you can help me with the reset period. And what is driving this high, I mean, are we able to pass on the hike or there is like a different set of customers we cater to where in large banks are not there?
Vivek Tripathi
So this is Vivek here. The entire business banking book is linked to the repo rate and it's a quarterly reset. So any rate hike which is there is passed on the next quarter. So every 90 days there is a reset for each contract. And then in presentation what we disclosed is the disbursement yields or its blended yield? No, I'm saying the portfolio yields have gone up because it was -- the entire book is linked to the repo rate. And even in case of incremental business what we are doing, we are sourcing at the incremental higher rate because the overall regime has changed. Even the competition ha
Q
Sir, last quarter you sounded a bit cautious on growth front, I think that deposit cost has gone up. What is our stance on outlook on growth now? And going into FY'24, what is your outlook on growth?
Sanjay Agarwal
So the last time also people read more into that. But if you have seen our growth in quarter 3, it is absolutely in line what I commented. And because it's not about only an asset growth, we need to see how deposit is being built, at what cost, at what tenure, at what rate. So I think we have - - we want to play very balanced role because we really want to build a very sustainable bank without any noise in any quarter. So I strongly believe that quarter 4 is always better than quarter 3, and we are absolutely on track. What I commented or promised as a team from quarter 1, we are supposed to d
Q
So if I just club what Mahrukh and Nitin asked earlier, so just wanted to get your thoughts on margin over next four to five quarters. Because if I see the incremental spread, they are about 70 basis points lower versus the back book and the deposits might continue to get repriced at least for the next couple of quarters. So I wanted to get your thoughts on margin actually for next probably a year or so?
Sanjay Agarwal
So again, I would say, it's difficult to comment now because, again, it's an evolving story that what type of interest rate cycles we are all are expecting. My sense is that we are nearing to an end of a higher interest rate regime, maybe one more or maybe not more than two. Our inflation is in our control. We are moving as an economy. So, and as I've already commented that bank is about balancing so many things. It's not only about NIMs. There are so many other things, and every year something plays out. Like this year, there's no treasury, no PSLC. But we are still able to manage our NIMs an
Q
Sir, two questions from my side. Firstly, on the margins a bit. Like on the vehicle book, you mentioned that you have been able to pass on the rate. But if I look at the last three quarter advance yields, they have only increased by around 10 bps. Just on a disbursement basis, if I see the total disbursements made in the past two quarters, they are around over 35% of your vehicle AUM. Just on thumb-rule basis the repricing and basis -- I think the yield impact would be more. So is it like -- because of competition we're giving -- this exchange we have not been able to pass like some color on t
Sanjay Agarwal
Punit, your audio is not clear at all. Voice is coming muffled.
Q
Congrats on good numbers.
Management
Q
No, unfortunately.
Management
Q
Sir, my first question is on the changes of the CASA ratio. So while I understand that there was pressure on the rates, deposit rate, so have you seen any migration of the retail customers from CASA blocking in the long-term rate in the term deposits or some other trends that you have got in?
Rishi Dhariwal
Pallav, Rishi Dhariwal here. I look after liabilities for AU Bank. You're right that, yes, as with other banks, there has been a trend for some of the customers to move their deposits to move some of their savings to deposits because I think when the rates came down in the last couple of years, that was really fast. And now when the rates have come up, customers haven't seen these kinds of rates in the last few years and they want to book their deposits at these kind of rates. But if we talk about the CASA ratio, what I would say is that we added to our branch network in the last couple of yea
Q
First is on the yields business. You mentioned that you have been able to pass on the repricing towards your customers. But on the last three quarters, the incremental increase in yields that you have reported is around only 10 bps. Just if I compare the disbursements of the last two quarters, they are around over 35% of the yields AUM. So what am I missing here? Like, because 10 bps seems to be quite low. Is it because there is increased competition, you have to do loans at lower rates, like which is common with the bank, like which is common with the commentary that other banks are reporting
Prince Tiwari
So if the first question is on Wheels, what I understand is you're saying that in the last three quarters, the disbursement yields have only gone up by 10 bps? Yes. Punit, Bhaskar here. If you look over Y-o-Y, we have gone up by about close to 65 bps there. And just over last quarter, we have gone up by 10 bps. What does happened is that by the time you knew the older rate and the new rate, the blending takes time, and that's all it is. But there has been a clear transmission of rates starting from the beginning of this year itself where every month-on-month we have been -- barring the month o
Q
Thanks, Inba, and thank you, everyone, for joining us and for your support. On behalf of the entire AU team, we wish you a happy, healthy, and prosperous 2023. Please reach out to the IR team for any further questions.
Management
Speaking time
Prince Tiwari
21
Moderator
18
Sanjay Agarwal
18
Pallav Garg
11
Ashlesh Sonje
7
Yogesh Jain
6
Nitin Aggarwal
6
Aseem Pant
5
Renish Bhuva
5
Rohan Mandora
3
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Opening remarks
Aseem Pant
Thank you, Inba. Good day to everyone, and welcome to AU Bank's Earnings Call for the Third Quarter of FY'23. We thank you all for joining the call and we hope you are well. As usual, for approximately the first 20 to 25 minutes of the call, we will have brief remarks by few members of our senior management team, followed by 30 to 45 minutes of Q&A. Firstly, we will have our MD and CEO, Mr. Sanjay Agarwal, share his thoughts on the overall performance and outlook for the bank. He will then be followed by our ED, Mr. Uttam Tibrewal, who will share his thoughts on the operating highlights for the quarter. Besides them, we also have few other members of our senior management to answer any other questions you might have. For the benefit of everyone, we would humbly request that the number of questions per participant be restricted to a maximum of two and to join back in the queue or email us in case you have any further questions. With that, I will request our MD and CEO, Mr. Sanjay Agarwa
Sanjay Agarwal
Thank you, Aseem. Good evening, everyone. Namaskar. Thank you for joining in. Hope you are doing well and had a fantastic start to 2023. The quarter gone by was the 23rd quarter in our banking journey and another quarter where we have demonstrated consistent performance and the team has delivered a strong set of numbers on all the fronts. We are on the course of namely a robust foundation for building a sustainable and a scalable bank. In terms of macro, you all know that global economic activity has been slowing down due to the adverse impact of geopolitical tensions, tightening global financial conditions, persistently high inflation and sharper than expected monetary tightening by central banks globally. Consequently, India continues to face intensified pressures due to the global inflationary trends, weakening global demand and high volatility in portfolio flows. Specifically, the tighter liquidity and a strong credit growth has led to the increased demand for deposits and rise in
Uttam Tibrewal
Thank you, Sanjay. Namaskar. Good evening. I'm wishing you a very purposeful and cheerful year 2023. Hope you all are in the best of health. The strength of our foundation and resilience of our business model is getting reaffirmed every day. And I'm happy to report that we have experienced the same momentum in the current quarter as well with all our businesses delivering a very strong and stable performance across all parameters. To reiterate, we started the fiscal year with a strong performance in Q1, which probably in my experience, was one of the best first quarter in the last five years. This was followed by a good Q2 helped by an early onset of the festive season and the festivities continued in current quarter as well. Throughout the first nine months of FY'23, we have consistently excelled across all aspects of our businesses from deposit growth to CASA growth to improve granularity and stable spreads to strong disbursements and collections. We have maintained a steady course n
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