Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- AU Small Finance Bank Ltd (NSE:AUBANK, Financial) has filed an application for a universal banking license, marking a significant milestone in its growth journey.
- The bank reported strong asset disbursement, achieving 20% of its annual target in the first quarter with a yield of 15.8%, up by 250 basis points from the previous quarter.
- The bank's CASA deposits grew by 1.8% over the pro forma merged CASA as of March 31, 2024, reflecting a strategic focus on low-cost deposits.
- The bank's asset quality remains strong, with a credit cost guidance of 1.10% to 1.15% for the year, indicating robust risk management practices.
- The integration of Fincare branches and the introduction of new products and partnerships have broadened the bank's service offerings and customer reach.
Negative Points
- The bank's cost of funds remains a concern, with a potential increase of 35 to 40 basis points expected over the fiscal year, which could impact margins.
- The microfinance segment has shown signs of stress, with collection efficiencies being lower than expected due to over-leverage and external factors like heat waves and elections.
- The bank's credit card business has faced challenges, with a need for calibration and optimization of credit appraisals and limits to manage risks.
- The bank's overall deposit growth was muted in the first quarter, necessitating a significant ramp-up in the remaining quarters to meet annual targets.
- The bank's cost-to-income ratio is expected to remain high, around 61% to 62%, indicating ongoing operational challenges.
Q & A Highlights
Q: Congratulations on the quarter of 1.6% ROE in the first quarter as well as the universal bank application. Can you provide a timeline for the universal bank license application and any regulatory requirements we should expect?
A: We aim to file the application by August. There are no additional regulatory requirements or balance sheet adjustments needed for the transition to a universal bank. The process should be straightforward, and our Chairman, Mr. HR Khan, will supervise the application.
Q: Given the strong ROE in the first quarter, do you expect this level to be stable throughout the fiscal year?
A: It's early in the year, and there are many variables. We aim to defend last year's ROE of 1.6%. While we managed costs well this quarter, we will need to raise deposits, which may come at a higher cost. We remain cautious but confident in our asset strategy and distribution network.
Q: With a 25% growth target for FY25, do you foresee any risks to asset growth if deposit growth doesn't meet expectations?
A: Our CD ratio is around 84%, giving us room to grow deposits. The challenge may be the cost, not the volume. We believe we can raise INR25,000 crore in deposits over the next nine months. The risk is more on the NIM, but we aim to maintain our ROE at 1.6%.
Q: Can you elaborate on the provisioning for the microfinance book and the current provisioning percentage?
A: We aim to maintain a credit cost of 3% annually for the microfinance business. Currently, we have around INR67 crores in provisions, excluding write-offs, which brings the total to 93% coverage. We will continue to build provisions each quarter.
Q: What is the strategy for the gold loan and credit card segments, given the recent yield increases?
A: For gold loans, we are adopting Fincare's strategy, which has been successful with yields around 16.2%. For credit cards, the yield increase is due to a higher term book, now at 19.7% of ENR. We have also calibrated our credit appraisals and optimized limits to manage risk better.
Q: How do you view the CD ratio in discussions with regulators, especially when adjusting for refinancing?
A: Regulators have a specified CD ratio definition, but we prefer to exclude refinance assets from the calculation. This gives us a more accurate picture of our CD ratio, which is around 84%, comfortably within the regulatory range of 80-85%.
Q: Can you provide insights into the cost of deposits and how it has behaved this quarter?
A: Our cost of funds has decreased from 7.10% to 7.03%. Savings account costs range between 5.5% to 5.9%, and term deposits have seen a 10 bps increase to 7.92%, partly due to the incoming Fincare deposit book.
Q: What is the outlook for cost of funds, given the 35-40 bps increase guidance for FY25?
A: The cost of funds may increase due to market conditions and competition. We aim to maintain our ROA at 1.6%, even if costs rise. The exact increase will depend on market dynamics, but we are prepared for a potential 35 bps rise.
Q: Can you explain the increase in NPAs in certain segments this quarter?
A: The increase in NPAs is partly due to seasonal factors like the general election and heatwave in North India. We expect a strong pull in collections in Q3 and Q4, and we remain confident in staying within our guided range for the year.
Q: What are the plans for capital raising, given the recent Board approval?
A: The capital raise approval is an enabling one, and we do not plan to raise capital in this fiscal year. Our Tier-1 capital is healthy, and we are focused on maintaining our current growth trajectory.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
