AUBANKNSEQ4 FY'23May 02, 2023

AU Small Finance Bank Limited

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Management on call

Sanjay Agarwal

MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER, AU SMALL FINANCE BANK

Uttam Tibrewal

EXECUTIVE DIRECTOR, AU SMALL FINANCE BANK

Deepak Jain

CHIEF RISK OFFICER, AU SMALL FINANCE BANK

Yogesh Jain

CHIEF OF STAFF, AU SMALL FINANCE BANK

Vimal Jain

CHIEF FINANCIAL OFFICER, AU SMALL FINANCE BANK

Bhaskar Vittal Karkera

CHIEF OF WHEELS, AU SMALL FINANCE BANK

Rishi Dhariwal

GROUP HEAD LIABILITY, AU SMALL FINANCE BANK

Prince Tiwari

HEAD (FIG & IR), AU SMALL FINANCE BANK

Key numbers — 40 extracted

30%

nd unnecessary negative perception around us. We promised to grow our business around 30%. And our numbers speak like this: Our deposits grew by 32%, now standing at Rs.69,000 crores-plus

32%

e promised to grow our business around 30%. And our numbers speak like this: Our deposits grew by 32%, now standing at Rs.69,000 crores-plus. Our assets after securitization grew by 26% standing at R

Rs.69,000 crore

r business around 30%. And our numbers speak like this: Our deposits grew by 32%, now standing at Rs.69,000 crores-plus. Our assets after securitization grew by 26% standing at Rs.59,000 crores, plus with pristi

26%

its grew by 32%, now standing at Rs.69,000 crores-plus. Our assets after securitization grew by 26% standing at Rs.59,000 crores, plus with pristine asset quality. We delivered sustainable and supe

Rs.59,000 crore

%, now standing at Rs.69,000 crores-plus. Our assets after securitization grew by 26% standing at Rs.59,000 crores, plus with pristine asset quality. We delivered sustainable and superior ROAs and ROEs at 1.8 an

38 lakh

with the launch of innovative product like credit cards and current account. We actually serve 38 lakh plus customers, 1,000 plus touch points in 21 states and 3 UTs by winning team of around 20,000 (

rs,

innovative product like credit cards and current account. We actually serve 38 lakh plus customers, 1,000 plus touch points in 21 states and 3 UTs by winning team of around 20,000 (Correct – 28,000)

1.4 billion

ic, determined and hardworking people. We at AU are very excited to participate in India story of 1.4 billion people, with economy expected to grow at 7% in the next 10 years by providing excellent product a

ery excited to participate in India story of 1.4 billion people, with economy expected to grow at 7% in the next 10 years by providing excellent product and services to build India. With a market

0.4%

0 years by providing excellent product and services to build India. With a market share of just 0.4% in both deposits and assets, the opportunities are immense, and sky is the limit. Our business

43%

sits, especially on a current account proposition. Last year, we grew current account deposits by 43%, bringing our CASA ratio to 38% and CASA plus retail deposit base at 69%. This helped contain our

38%

count proposition. Last year, we grew current account deposits by 43%, bringing our CASA ratio to 38% and CASA plus retail deposit base at 69%. This helped contain our cost of money at similar level

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Guidance — 20 items

Prince Tiwari

opening

“The format for today's call will be very similar to last few quarters where we will start with Opening Remarks from Senior Management for the first 20-25 minutes of the call and we'll follow that with 30 to 35 minutes of Questions and Answers from all the Analysts and Investors.”

Coming to India

opening

“Further, our margins will be protected by continuous investment in strengthening current account propositions, transition banking, focus on data and its capabilities, automation of credit and process reengineering.”

Coming to India

opening

“Moving ahead, we expect the advantage of scale to start kicking in, and by the year end, our investments in investor lending, video Banking, unsecured lending and cross sell will start positively impacting the P&L.”

Coming to India

opening

“There will be more pool of revenues from AD- 1 license, wealth product, etc., Credit card business is also expected to break even in the next one year.”

Coming to India

opening

“Our digital insurance and wealth proposition have also started gaining traction and this year we would further enhance and scale this and will be soon launching “Merchant App.” We are also enhancing our digital payment stack with more powerful propositions around UPI, BBPS, Fastag etc.”

On our asset businesses

opening

“Focus will be on bringing efficiency, productivity and automation & digitization and leveraging existing customer base through cross selling.”

Bhavesh Kanani

“One, when we look at the ROA profile for this year, and when we think about the key trends likely next year, one would expect that NIM would be under a little bit of pressure, provisions which have been pretty low this year can be addressed for going up, and all the while we will continue to spend heavily on strengthening our franchisee.”

Bhavesh Kanani

“So, is it right to expect that the ROA for next year could be lower than where we've ended this year, your thoughts on this?”

Prince Tiwari

“Of course, there will be some amount of catching up, that's going to happen with a lag, that's happening in the entire industry and that will happen with us as well.”

Prince Tiwari

“So, you're absolutely right, that there will be some amount of pickup in the cost of funds in the next financial year.”

Risks & concerns — 13 flagged

Our focus is to build sustainable low cost granular deposit franchise, where the challenge as of now is around interest rates.

— Coming to India

Looking ahead, the strong credit demand will keep the pressure on deposit rates, and we will need to manage our cost of funds, thus growing our current account business will remain a key focus.

— To sum up

One, when we look at the ROA profile for this year, and when we think about the key trends likely next year, one would expect that NIM would be under a little bit of pressure, provisions which have been pretty low this year can be addressed for going up, and all the while we will continue to spend heavily on strengthening our franchisee.

— Bhavesh Kanani

So, while there will be an intense pressure, as Uttam ji also said in his speech, we are looking to add current accounts, we are also trying to see how we can play with the mix, we securitized some of the portfolios last year to get advantage.

— Prince Tiwari

So, there will be a pressure on NIMs that is clearly there because it is not easy to also transfer the entire pressure on the borrowers because there is a lot much competition also there.

— Sanjay Agarwal

So, one is on the vehicle book, I mean, so, after a long, six, seven quarters, we have seen the absolute decline in the book despite there is an industry tailwind.

— Renish Bhuva

And he does not belong to a business or does not belong to a particular kind of mindset, right, he belongs to a risk mindset.

— Sanjay Agarwal

FYI, we have also given on slide number 31, specifically, the overall ROA impact of all our digital initiatives, including credit card.

— Prince Tiwari

Secondly, with respect to yield, maybe you highlighted in terms of 30, 40 bps pressure on NIMs, and if I have to look at it in terms of the cost of funds, given that now it's stabilizing, there will be some catch up.

— Kunal Shah

So, that is why there might be pressure on NIM because you will see that our cost of money going up and yields are not there on the overall asset.

— Sanjay Agarwal

So, I want to be really cautious here because deposits is also not available at will, right?

— Sanjay Agarwal

And now looking at the potential margin compression, and also the SBU profitability showing that additional investments are not adding anything to ROA.

— Nitin Agarwal

But as we move into FY25, and as I said, some of the investments start tapering off, and some of the revenue pool starts kicking in, including AD1, and credit cards and other things, hopefully, you will start seeing a gradual decline in cost-to-income for us.

— Prince Tiwari

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Q&A — 12 exchanges

I have two questions. One, when we look at the ROA profile for this year, and when we think about the key trends likely next year, one would expect that NIM would be under a little bit of pressure, provisions which have been pretty low this year can be addressed for going up, and all the while we will continue to spend heavily on strengthening our franchisee. So, is it right to expect that the ROA for next year could be lower than where we've ended this year, your thoughts on this? And if you can help us understand the lower effective tax rate for this quarter?

Prince Tiwari

This is Prince here. So, maybe I'll start and then probably Sanjay ji can add. So, as you rightly said, for the last two years if you see, overall, our margins have actually expanded quite well. And we have got the benefit of the tailwind on the cost of funds given the lower liquidity post- pandemic. And even as of today, as we have mentioned in the presentation, we have managed to maintain our overall cost of funds for the last financial year in FY23 at the same level of FY22. Of course, there will be some amount of catching up, that's going to happen with a lag, that's happening in the entir

Just two questions from my side. So, one is on the vehicle book, I mean, so, after a long, six, seven quarters, we have seen the absolute decline in the book despite there is an industry tailwind. So, just trying to get a sense what is happening there?

Prince Tiwari

Before Bhaskar ji answers, let me just clarify. The vehicle book hasn’t really declined, in fact, it has gone up. But yes, we have also securitized some business this year, or this quarter. And because of that you are seeing in the absolute terms only on gross advances. If you look at the overall Wheels book, then the growth has been upwards of about 32%. You need to add these securitized book in the overall to figure out the growth. Nothing changes on Wheels. It's just a matter of the securitized book. Otherwise, all products in the market that we have, the things that we do, we continue to d

Two questions. The first one is on the Wheels. If we can split the book into various asset classes of what comprises of how much proportion, what would be LCV, HCV, cars, tractors so on and so forth? The second question is on the initial comments Sanjay ji made about breakeven of the credit card business in FY25. This seems very aggressive compared to any other Bank in India, there is no Bank, which can claim a break even in credit card business in flat three years, generally takes around five to seven years, the largest of the Banks in India have done it in as much time. So, given the fact th

Sanjay Agarwal

Should I answer you the latter one first. I hope you would have gone through our credit card presentation done to really explain our strategy around it. So, as you know we are more of a self- employed kind of lenders, and we know how to lend in core markets over the years. So, we are not playing to the galleries to be very honest, because credit card as a business is very lucrative, post our all digitization across country, and now it's a first product to be very honest for the payments, and the oldest one. That data which we are getting every month, and we have seen… as you would have read on

My question is on the breakup of the fixed and floating rate book. So, currently, as we have 66% in the floating rate, and assuming that the repo rate will remain the same, so do we hope that the fixed rate breakup will go high or do we have a projection on what will be the sort of breakup between the fixed and the floating rate book?

Prince Tiwari

What we have given and what we generally talk about is the mix on the overall asset level. So, you'd see we have like four broad businesses on the asset side. Of course, you have Wheels and SBL, which are predominantly fixed rate books, and then you have home loans and commercial vehicles, which are predominantly variable rate books, right. So, the overall composition of these books have already been given. And we broadly think that we'll probably try to maintain somewhere around this mix, where retail assets, which is home loans, plus SBL, plus Wheels would be anywhere around 60% to 65% and p

So, the question is on the fee income side. So, lot many levers now available be it in terms of the increasing contribution of credit card plus distribution and AD1 license would also help. So, where do we see fee income to assets settle, what would be maybe our aspirational ratio for fee income to assets and when do we expect to achieve that over… how many years?

Prince Tiwari

If you see our entire other income or fee income ratio to assets, for the current year, it has been anywhere around 1.3%. And at a core other income, it has been about 1.4%. So, obviously, this was a year when we didn't have any one-off in terms of income, there was no treasury gains, there was no PSLC fee income, right. So, this is a pure and pure core operating fee income at about 1.4% of assets. Now, if you move forward from here, and for some of the levers that you talked about, definitely it should go up. Now, the question is, at what level and to what extent? We'll have to see honestly.

So, I was looking at the slide 35, where we are showing the deposit mix split between individuals, corporates, etc., So, if you look at it quarter-on- quarter, there is an increase, five percentage points from government and corporate while the individual deposits has come down. So, just wanted to understand how sticky is this deposit flow that we're seeing more on the bulk side from government and corporates?

Rishi Dhariwal

Across the year, the deposits between the government and retail have actually moved more towards retail. Only in the last quarter because, we continue to focus on getting more and more granular retail, so the composition between the individuals and corporate sort of looks a bit slightly lower than the Q3, and we managed to win a couple of good government deals. These are transacting accounts that we have, we won mandates from the government departments as well as businesses, where we have transacting accounts from them, and that is what has helped us to sort of get that number over there. So,

So, on the deposit side, we have done very well and you indicated that as an SFB, we have to take any good deposit that's coming our way. But the excess liquidity on the balance sheet is looking quite high. So, if you can quantify that number? And now looking at the potential margin compression, and also the SBU profitability showing that additional investments are not adding anything to ROA. So, what would be your approach on this point, like would we look to reduce this excess liquidity or will you continue to raise deposits at this space?

Sanjay Agarwal

I would say that whatever way we have done in last six years, whether it's our deposit built up strategy, asset built up strategy, the quality around it, the cost around it, the people around it, the tech around it, like I'm very happy to see that our credit card business becoming profitable next year. We already started monetizing our QR code business, we have already started building our video Banking as an option to branch Banking, right. So, I don't have a choice but not to invest to be very honest. Because we are looking to build this Bank for the next maybe 100 years, right? And tech is

First question is on the SBL book. If I include the securitized book, that segment has grown about 7% QoQ which is a healthy number. What run rate do you expect for this growth in the near future?

Sanjay Agarwal

SBL book should grow in the range of 20% - 22% year-on-year, right, plus/minus 1% - 2% here and there because we have got a scale now, it's north of Rs.20,000 crores. So, I think it will go around 20% - 22% range every year. Secondly, you mentioned that you're taken some hikes already on interest rates on the new regulations in both SBL and Wheels. Can you quantify roughly a weighted average number or something, the hike which you have taken on new origination? In the incremental capacity, you have data. Incrementally in one year term, how much incremental you have passed on to the borrowers?

What's the reason behind more securitizing in this quarter?

Sanjay Agarwal

Again, about optimizing your cost I think we have raised securitization at 100 bps lower than the cost of overall incremental money in March. So, at what rate the securitizing is happening right now? As we said, during the Q4, we securitized 3,000 crores, as we have disclosed and the average rate there would be about 100 bps lower than where we would normally raise term deposits. So, obviously, it gives you a longer term funding, which is matched, so, helps us to optimize our mix on the liability side, and also helps us on the overall liability, how much growth that we can do and, focus on ret

So, firstly, how should we think about cost-to-income ratio in FY24 and beyond, will it remain at the same level?

Prince Tiwari

Maybe I'll start in, Sanjay ji can add. So, on the cost-to-income side, as you have seen that Q1, obviously, we went up to 65%. But, we have done well to manage the cost overall for the full year at about 63%, where we had initially talked about 60% to 63%. And, as we have been saying earlier in the call that there are many more profit pools, which are just around the corner. So, we have been investing, and that's part of the reason why our cost-to-income has been higher. So, this year, obviously, the cost-to-income should broadly be in the range at where we are. But as we move into FY25, and

As we mature in our investments over the next 12, 18 months, and with the kind of credit quality that we've demonstrated over a large part of our history, what would you see as a steady state ROA as the business matures in the next three to five years, or will we be happy with the current range of 1.8% to 2% just from a construct perspective given that we have a large granular asset book, liability franchise which is improving on the right side, and probably the curve of high investments will be over. So, just wanted to get Sanjay ji thoughts on that.

Sanjay Agarwal

I think a good question, and thank you for understanding us, because we are doing lot many investment to really build future, right? And if you ask me about my three to five time horizon, and if the interest rates doesn't go off the rack, right, and it remains in one range, I strongly believe that this kind of interest rates are not sustainable, right, for any kind of a country, so, it will come down. Because, ROA depends on NIMs and other incomes and credit costs, and all those things. So, I strongly believe in the next three to five years, the way we are building ourselves, and as of now wil

Thank you everyone for joining the call and for your questions and for all your support. Look forward to interacting more. In case you have any further questions, kindly reach out to the IR team? This is Prince signing off from AU management side. Thank you so much.

Management

Speaking time

Sanjay Agarwal

Prince Tiwari

Moderator

Bhaskar V Karkera

P Subramanian

Renish Bhuva

Kunal Shah

Ashlesh Sonje

Pankaj Agarwal

Bhavesh Kanani

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Opening remarks

Prince Tiwari

Good evening, everyone and welcome to AU Small Finance Bank Earnings Call for the Fourth Quarter of FY'23. We thank you all for joining the call today. The format for today's call will be very similar to last few quarters where we will start with Opening Remarks from Senior Management for the first 20-25 minutes of the call and we'll follow that with 30 to 35 minutes of Questions and Answers from all the Analysts and Investors. To start the call, we'll have our M.D. and CEO – Mr. Sanjay Agarwal, share his thoughts on FY23 Overall Performance and Outlook for the Bank. He will be followed by our ED – Mr. Uttam Tibrewal, who will share his thoughts on Operating Highlights for the Quarter and the Financial Year. Besides them, we also have few senior members of our management team on the call today to answer any questions that you may have. For the benefit of everyone, and so that we can take everyone's questions, we would humbly request everyone to keep the number of questions per particip

Sanjay Agarwal

So, thanks, Prince. Hi, everyone. Good evening. Namaskar. I'm very happy to speak to you on this call today as we recently celebrated 28 years of our existence, and six year of Banking. It has been an incredible journey, and a wonderful experience to build a Bank like AU. I met so many of you last year during the roadshow while raising capital, where we got tremendous support, affection, acceptance not only of our business model, but also for me as an individual. Today, I'm happy to share that we have fulfilled all our promises made last year during the roadshow despite many headwinds like inflation-led high interest rate cycles, liquidity issues, and unnecessary negative perception around us. We promised to grow our business around 30%. And our numbers speak like this: Our deposits grew by 32%, now standing at Rs.69,000 crores-plus. Our assets after securitization grew by 26% standing at Rs.59,000 crores, plus with pristine asset quality. We delivered sustainable and superior ROAs and

Coming to India

We remain on a very different trajectory as a country of optimistic, determined and hardworking people. We at AU are very excited to participate in India story of 1.4 billion people, with economy expected to grow at 7% in the next 10 years by providing excellent product and services to build India. With a market share of just 0.4% in both deposits and assets, the opportunities are immense, and sky is the limit. Our business model is well settled. We will remain in identified market segments, like urban markets for garnering deposits, and for lending the core and the rural markets. Our focus is to build sustainable low cost granular deposit franchise, where the challenge as of now is around interest rates. But, we will continue to manage with strong emphasis on CASA and granular deposits, especially on a current account proposition. Last year, we grew current account deposits by 43%, bringing our CASA ratio to 38% and CASA plus retail deposit base at 69%. This helped contain our cost of

Uttam Tibrewal

Thank you, Sanjay. Namaskar and a very good evening to everyone I hope you all are in good health. FY23 witnessed resurgence of demand across various Industries. The domestic consumption on the rise along with increased on-ground activity and a positive outlook for India's GDP growth. Our expectations of FY23 may remain well on track. As we conclude Q4FY23 I am pleased to report that AU Small Finance Bank has delivered a consistently strong and stable performance across all our businesses throughout the quarter and also the entire fiscal year. From build out of our digital properties to deposit growth to CASA growth and improve granularity in the consistent loan growth with ever strengthening asset quality, we have diligently focused on excelling in every aspect of our customer-centric business. Notably, we have managed to keep our gross NPA below Rs.1,000 crores thereby bringing down our GNPA to 1.66% and net NPA to 0.42% on the back of strong collection efforts, while still true to o

Moving on to our secured business loans

In Q4FY23 we saw our highest ever quarterly disbursals of Rs.2,300 crores in SBL segment. Yearly disbursals stood at Rs.6,717 crores with year-on-year growth of 39%, with an average ticket size of 11.6 lakhs and across 60,000 loans. The total SBL portfolio stood at 19,509 crores, an annual increase of 18% with portfolio IRR of 15% and GNPA at 2.5% across 2.5 lakh live customers. With the increasing number of MSMEs and rapid formalization in the sector, we believe the size of the pie will keep expanding. As AU has been serving the segment for last 15 years, we have built a sustainable business model to serve the majority of our customers in rural and semi-urban areas. We are well equipped to penetrate existing markets and venture into new ones.

Moving on to our home loan businesses

As a relatively younger book, the portfolio of housing book grew by 63% year-on-year to Rs.4,283 crores across 42,400 loans, with an average ticket size of 11.81 lakhs and an IRR of 11.8%. In Q4FY23, we disbursed Rs.722 crores taking the total annual disbursement to Rs.2,200 crores. Currently, home loans are available at ~240 branches of the Bank and we have scope to expand coverage to all our touch points in due course to encourage retail cross sell. Our GNPA was stable at 0.33%. And it is noteworthy that much of our Affordable Housing book is also eligible for long term refinance from NHB.

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