AUBANKNSEQ2 FY24November 03, 2023

AU Small Finance Bank Limited

14,159words
148turns
10analyst exchanges
12executives
Management on call
Sanjay Agarwal
MANAGING DIRECTOR AND
Uttam Tibrewal
EXECUTIVE DIRECTOR – AU SMALL FINANCE BANK LIMITED
Prince Tiwari
HEAD OF INVESTOR RELATIONS
Gaurav Jain
PRESIDENT FINANCE &
Deepak Jain
CHIEF RISK OFFICER - AU SMALL FINANCE BANK LIMITED
Yogesh Jain
CHIEF OPERATING OFFICER - AU SMALL FINANCE BANK LIMITED
Vimal Jain
CHIEF FINANCIAL OFFICER - AU SMALL FINANCE BANK LIMITED
Vivek Tripathi
HEAD OF COMMERCIAL
Bhaskar Karkera
HEAD OF RETAIL ASSETS – AU SMALL FINANCE BANK LIMITED
Rishi Dhariwal
GROUP HEAD LIABILITY - AU SMALL FINANCE BANK LIMITED
Mayank Markanday
HEAD OF DIGITAL BANK
Kunal Kakkar
SENIOR VP INVESTOR
Key numbers — 40 extracted
3.6 lakh
d we are navigating the headwinds quite deftly. Some key highlights for the quarter, we onboarded 3.6 lakh new customers during the quarter, and our total customer base has now reached around 44 lakh lakh
44 lakh
ded 3.6 lakh new customers during the quarter, and our total customer base has now reached around 44 lakh lakh customers. We have crossed a landmark of INR75,000 crores in deposits and INR1 lakh crore in
INR75,000 crore
otal customer base has now reached around 44 lakh lakh customers. We have crossed a landmark of INR75,000 crores in deposits and INR1 lakh crore in asset book or balance sheet size, if you include securitized
INR1 lakh crore
d around 44 lakh lakh customers. We have crossed a landmark of INR75,000 crores in deposits and INR1 lakh crore in asset book or balance sheet size, if you include securitized book. On our overall deposits, it
30%
book or balance sheet size, if you include securitized book. On our overall deposits, it grew by 30% year-on-year basis and 9% quarter-on-quarter basis, supported by a CASA growth of 6% on a quart
9%
, if you include securitized book. On our overall deposits, it grew by 30% year-on-year basis and 9% quarter-on-quarter basis, supported by a CASA growth of 6% on a quarter-on-quarter basis. However
6%
it grew by 30% year-on-year basis and 9% quarter-on-quarter basis, supported by a CASA growth of 6% on a quarter-on-quarter basis. However, as I talked about, due to tight liquidity and higher pres
4%
tes, a good credit offtake, there is pressure in CASA mobilization, and our CASA ratio is down by 4% since March 23. We are navigating the challenges and focusing on optimizing the liquidity and man
25 basis point
nd rural areas to unlock the potential. During the quarter, our peak deposit rates increased by 25 basis points across savings and term deposits, taking our FD rate to 8%, the peak FD rate for non-senior citi
8%
eposit rates increased by 25 basis points across savings and term deposits, taking our FD rate to 8%, the peak FD rate for non-senior citizens to 8.5% and peak savings account bucket at seven quarte
8.5%
savings and term deposits, taking our FD rate to 8%, the peak FD rate for non-senior citizens to 8.5% and peak savings account bucket at seven quarter. Consequently, there was an impact on the cost o
12 bps
at seven quarter. Consequently, there was an impact on the cost of fund, which increased by about 12 bps from the last quarter, reaching to 6.7%. On an average cost of fund for the first half of the yea
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Guidance — 20 items
Prince Tiwari
opening
“So, our fixed rate retail book will be advantageous once the interest rate cycle turns.”
Prince Tiwari
opening
“There is absolutely no pocket of stress in any particular segment or sector and the increase in GNPA and consequent credit cost can solely be attributed to seasonality and we hope to see a strong performance in the last quarter of this financial year as has been the case over the last 20 years.”
Prince Tiwari
opening
“In a nutshell, we expect the asset quality to remain within our range with no specific pocket of stress or any early warning signals.”
Prince Tiwari
opening
“Our cost to income ratios remains a key monitorable and for the full year, we expect to land somewhere very similar to last financial year.”
Prince Tiwari
opening
“And we are expecting that with the operationalization of our AD1 license by the end of this financial year, trade and transaction banking will be the newest addition to this group.”
Sanjay Agarwal
opening
“This is an all-stock merger with Fincare small finance bank merging into AU small finance bank and shares will be issued to all Fincare small finance bank shareholders as per the agreed share swap ratio.”
Sanjay Agarwal
opening
“MFI has grown at CAGR of 32% over the last year, last 10 years actually.”
Sanjay Agarwal
opening
“Post-merger, MFI would be 8% of our balance sheet and we would intend to keep it around 10% of our balance sheet going forward.”
Sanjay Agarwal
opening
“Rajiv will be appointed Deputy CEO of AU SFB post-merger.”
Sanjay Agarwal
qa
“And there will be, in my opinion, in my journey of the entrepreneurship, we can't time yourself.”
Risks & concerns — 15 flagged
However, on the liability side, we continue to see competitive pressure amidst tight liquidity and higher inflation, leading to higher interest rates and persistent interest rates.
— Prince Tiwari
However, as I talked about, due to tight liquidity and higher pressure on the interest rates, a good credit offtake, there is pressure in CASA mobilization, and our CASA ratio is down by 4% since March 23.
— Prince Tiwari
And this obviously has some pressure on margins.
— Prince Tiwari
But what we would like to emphasize is that this flattishness in the yield is more structural in nature as we move towards lower credit cost businesses and better risk profiles customers.
— Prince Tiwari
Now, this changing mix where we are moving towards lower yielding franchise businesses like business banking, agri-banking, home loans, will continue to put pressure on margins.
— Prince Tiwari
There is absolutely no pocket of stress in any particular segment or sector and the increase in GNPA and consequent credit cost can solely be attributed to seasonality and we hope to see a strong performance in the last quarter of this financial year as has been the case over the last 20 years.
— Prince Tiwari
In a nutshell, we expect the asset quality to remain within our range with no specific pocket of stress or any early warning signals.
— Prince Tiwari
We went live with our wheels origination lending system in collaboration with Salesforce and FICO and so far in the initial phase, our STP rates on the card loans have gone to about 30% and decline rates have reduced by 50%.
— Prince Tiwari
You know that I had my own stand around the MFI business and, of course, the overall unsecured piece, but we need to evolve ourself, we need to understand the risk around it.
— Sanjay Agarwal
You know, there would be some couple of more quarter challenge, but in the long term, I strongly believe that we are in the course of our March '27 agenda where we believe that our first 10 years should be very noise-free.
— Sanjay Agarwal
Some of the business that we created during the pandemic time because there was abundant liquidity, and that business did get created at – because we were very cautious, the credit filters were too tight.
— Prince Tiwari
I mean, does that poses a risk of some growth derailment at the standalone entity?
— Renish Bhuva
But once I met Rajiv and the team maybe two quarters back and figured out their own experience around building this business from grounds up, and this team has really managed their remarkable growth in spite of so many challenges over the years, be it 2008 challenge, 2010 challenge, maybe around 2016-‘17, and then, of course, again in 2020 post-COVID.
— Sanjay Agarwal
So again, I can only say this because it's difficult to comment everything so upfront.
— Sanjay Agarwal
So honestly, while one year or two years, it is prone to event risk.
— Prince Tiwari
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Q&A — 10 exchanges
Q
Sir, two questions. One is on the merger. And sir, you alluded to the thought process behind this. If I just wanted to understand a little more on how would you think about this merger, how long you evaluate it? And also, sir, because there is a size wherein we are like trying to build up our deposit and we’re growing very healthy at 25%. Was there in the journey, isn’t it too early to get into a merger? It takes time. Maybe the deal is really good in terms of size and geographical opportunity and the product that bring in and with the management team is so strong. But doesn’t it like derail t
Sanjay Agarwal
Yes, Bhavik, let me answer the first one. So as you know that we are -- in my opinion, we are - - one of that franchise which has become lot much stable, lot much confidant in last, what now, 6 years. You know that our overall deposit franchise or asset franchise or digital franchise, overall governance, everything remains in shape, and I'm very happy the way we have built ourselves in the last 6 years. And there will be, in my opinion, in my journey of the entrepreneurship, we can't time yourself. It is about the availability. It is about the opportunity of that time, which we need to underst
Q
Sir, just two questions from my side. One is on the fee income part, wherein the general banking fees, has seen a very sharp jump in Q2 from INR55-odd crores to almost INR130 crores in Q2. So can you please throw some light on what is driving this sudden jump in this income line and whether this is sustainable or not?
Vimal jain
So it's a sustainable basis only. It's related to insurance, where we have the other insurance partners and our insurance business is also increasing. So it's a sustainable basis. If you see, Renish, the credit card fee I mean we have been saying this all along. Almost for 2 years. Yes Sanjay this side. So I think this is well laid down strategy of last maybe couple of years where we have focused on our insurance business, we really want to build a wealth proposition for our customers. We really want to build our credit card business. And as we move forward, once we get our AD-I operationalise
Q
Yes. Hi, sir. Thanks for the opportunity. So, sir, if we look at AU Bank, it has had certain strengths in its business model, which has enabled it to deliver strong performance over the years. So I just want to understand when you were evaluating this transition with Fincare, what, as per you, were the key strengths in the business model of Fincare other than the complementary geographical presence and MFI book that comes in? So on the core business understanding perspective, if there's something which differentiates Fincare? That was one. And second, sir, associated question here is that we h
Sanjay Agarwal
Yes. should I reply now? Or do you want to ask a second one? So maybe you can apply that and then I'll take the second one. Yes. Okay. Fine. So I think a brilliant question. So I think you're absolutely right that we had a longstanding position that we don't want to do microfinance as a subject. But we also have gone through our own evolution mindset in terms of what we should do or what we should not do on a bank platform. And microfinance also has gone through all those up and downs in the last maybe 15 years. But I think, if you see now, the whole regulation framework, the focus, the kind o
Q
Yes, hi. Good morning, Sanjay ji and team. And congrats on the merger. A few questions I have, like, first is on the securitization. We have been going for higher securitization. This contributed around INR2,900 crores. So what is your strategy on the same going forward? And the second one is on the stronger growth that we have reported in commercial assets, along with the securitization, again, that we are doing. How will that impact the PSL compliance? So if you can share some color as to where the bank stands on the overall PSL compliance, and how do you see that going forward with the stra
Sanjay Agarwal
Thanks, Nitin. But I think I will ask Prince to reply on this. Yes, Nitin. So again, securitization, as we have been saying, that it serves multiple purposes. One, obviously, it diversifies my funding profile. And to that extent, it helps me on the liability side, puts lesser pressure on the team, especially in an environment where the interest rates is high. And we don't want to load up ourselves on the bulk deposits. So securitization obviously proves a way to generate liquidity. Second, it obviously frees up capital, I think. But that's not the main reason. I think your last point, or the s
Q
Sir, thank you for the opportunity. What is the reason for the INR700 crores funding incursion by Fincare SFB? Is it more to do with that, basically, you want some cleanup act before the merger happens?
Sanjay Agarwal
No, Anand, I think everybody knows that Fincare was about to launch their own IPO and they were supposed to raise capital and they're high leveraged in that sense. So, and they and merger will take some more time, right? It is not happening today, tomorrow, right? So, and they need a capital for their own business as usual. So their own team has, or their own investor has committed to the team that, they will put this money and we accepted that. So is that simple, in my opinion? Yes, and Anand, on the GNPA side, again, on the cleanup act, the book is already fairly clean. As on 30th September,
Q
Yes, hi. Good morning. Thanks for the opportunity and congratulations to the team for this strategic merger. So a couple of questions. One is on the shareholding of Fincare small finance bank. We do understand that there are quite a few private equity players, both at the holdco level as well as the operating bank level. So as per the DRHP, some of them have expressed their intent to pair some of their holdings as well. So as a part of the merger agreement, is there any lock-in for the existing shareholders of Fincare, SFB or the holdco? Or how does that work?
Prince Tiwari
So Umang, as you rightly said, there are private equities, but they are all at the holdco level and holdco owns about 80% of the bank. And the merger is between the bank and the holdco is not a part of the entire merger process. And hence, we will be issuing shares to the holdco. And as Sanjayji said in the earlier question, the holdco doesn't – it's a non-operative holdco. They don't have any other assets. So it's up to them to decide. But our understanding is that even if they go for distribution of this asset or the shares of AU to the underlying investors, they'll have to go through a diss
Q
Hi. Thank you for the opportunity. Two questions really. One relates to the merger and the other relates to your own business. The first question related to the merger is one of the calling cards of AU, even in its existence as an NBFC, was that even while it was present in higher yield and smaller customers and so on and so forth, it was always able to deliver NPAs and credit costs which compared with the best-in-class banks and there and thereabouts, something that very few other companies have managed. And we know the stories around how Sanjayji himself was so focused on that the credit cul
Sanjay Agarwal
Thank you, Shantanu. Thank you for the kind words. So, I will answer the first one, because that's very important that, we always discuss that, why AU should not be in a microfinance business or in an unsecured profile. But, again, we'll say that, the world has changed dramatically over the years. The whole economic cycle has changed dramatically over the years. The whole loan profile, the segment also has changed in India, too. We have got a lot much data available now, and as you would have seen that why we started credit card, why we started personal loan also, that it makes your banking fr
Q
Yes, hi. Thanks for the opportunity. Most of my questions relating to the merger have largely, largely been answered. So, just a couple of questions. Firstly, on this securitization, which you have done, you know, a large amount of securitization in this quarter. So, you've also had a very strong deposit growth, right? So, could you just explain the reason for the securitization? Your, CD ratio has come down and I'm also seeing the LCR has come down, quarter-on-quarter. So, you explained that securitization is helping you on the liquidity front. But I just wanted to understand, how you're look
Sanjay Agarwal
Yes. So, my friend, we actually plan ourselves for whole year basis, right? So, again, I want to comment that, because it is not that it will be available maybe last quarter and when we need the money, right? So, I think we as executive need to take decision day in day out to really see our sustainable growth. And, if you're doing some transaction in the month of September, like, what Prince commented, it was non-PSL, a better rate, maybe offered you in September only, right? So, I think it's based on those businesses requirement which we take decisions. Sometimes it doesn't look nice on the b
Q
Yes. Good morning and thank you for the opportunity. So, firstly, Rajiv and his team, which will join AU after the merger, is there a tenor lock-in for the team to stay with the bank?
Sanjay Agarwal
No, nothing like that. It's more basis trust. It's more basis that we want to work with each other. So, I think that bonding is far, far better than any kind of documentation bonding, because those are very highly experienced team. Rajiv is working as an MD of a bank. So, we expect that he should be given the same treatment, same respect. And we really want to make it a very happy merger where people come voluntarily, for the common cause, and put their effort. But overall, yes, because we have appointed Aon Hewitt to advise us for a better integration, because people will have their own choic
Q
Yes. Thank you, Michelle, and thank you, everyone, for participating. We really look forward to this merger. We have really worked hard on this in the last quarter and it was very exciting and a lot of learning experience for the whole team, including myself, and we look forward to your support, give us an opportunity and will not prove you wrong. Thank you so much. And if you have any residual questions, you can always reach out to the Investor Relations team. Thank you.
Management
Speaking time
Sanjay Agarwal
38
Prince Tiwari
35
Moderator
12
Manish Shukla
10
Nitin Aggarwal
6
Anand Dama
6
Umang Shah
6
Param Subramanian
6
Renish Bhuva
5
Rohan Mandora
5
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Opening remarks
Prince Tiwari
Thank you, Michelle. And good morning, everyone. And welcome to AU Small Finance Bank's earnings call for the second quarter of FY24. We thank you all for joining the call early in the morning. As some of you may have seen, we made a major strategic announcement yesterday evening. And we appreciate that you all might want to hear from the management on the strategic thinking and the road ahead. We thus have tweaked the format for today's call a bit. After providing you with brief commentary on the quarterly results, I'll invite our founder and MD and CEO, Mr. Sanjay Agrawal, to share his thoughts on the proposed merger and the way forward. In the interest of time, I have requested Uttamji to kindly skip his business highlights for the current quarter. And post Sanjayji's comment, we will straightaway jump into the Q&A session with the participating analysts and investors. Apart from Sanjayji and Uttamji, we also have a few senior members of our management team on the call today to answ
Sanjay Agarwal
Thank you, Prince. Good morning, friends. And thanks for joining us early in the morning. Prince has already spoken about last quarter's performance. I strongly believe we remain on course in our business in terms of deposit growth, asset growth, people and technology. And are putting our best foot forward to handle challenges, uncertainties due to macroeconomic environment. Now, I would speak about the transformative merger we announced last night. As an institution, we have come a long way from our humble background of being NBFC to becoming the largest small finance bank in the country. Throughout our journey, we have believed in our vision of becoming one of the world's most trusted retail bank and have been governed by our dharmas, which are a true reflection of who we are and what we stand for. Another institution which started its journey in a similar fashion and has built up, ground up, is Fincare small finance bank. Fincare has witnessed remarkable growth while pursuing an inc
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