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AU Small Finance Bank Ltd
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Ladies and gentlemen, good day and welcome to AU Small Finance Bank Q2 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aseem Pant from IR team. Thank you and over to you, sir.
Thanks, Faizan. Good day to everyone, and welcome to AU Bank's Earnings Call for the Second Quarter of FY '23. We thank you all for joining the call and we hope you are well. As usual, for approximately the first 30 minutes of the call, we will have brief remarks by few members of our senior management, 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 performance and overall outlook for the Bank. He will be followed by our ED, Mr. Uttam Tibrewal, who will share his thoughts on the assets and liabilities performance. And finally, we will have Mr. Gaurav Jain, Head of Tech Initiatives and Distribution Strategy, who will talk about our progress in Digital Initiatives. Besides them, we will also have few other members of our senior management to answer any questions you might have. For the benefit of everyone, we would humbly request that the number of questions per participant be restricted to 2, and to join back in queue or mail us in case you have any further questions.
We'd also like to take this opportunity to announce that our third AU Insights session is scheduled for November 3, and will be held virtually. We will share further details in due course and we look forward to your participation.
With that, I will request our MD and CEO, Mr. Sanjay Agarwal, to share his thoughts on the Bank's performance and outlook.
Thank you, Aseem. Good evening, everyone. Namaskar. Thank you for joining in. Hope you're doing well. To begin with, I just want to wish everyone a very Happy Diwali and very happy festive season.
This quarter makes us 22 quarters old in our journey of banking and I'm amazed to see the progress that we're making as a team. In this 5.5 years, we have been standing our foundation for building a scalable and sustainable bank and we are on course, of course. We have managed to grow the Bank to a net worth of more than INR 10,000 crores and both asset and deposits have crossed that typical milestone of INR 50,000 crores while serving 30 lakh plus customers.
I would like to express myself that each passing quarter increases our confidence that we are on the right path, going the right way, with right purpose, right strategy and right attitude. I'm very excited about the road ahead of us as the banking system will see tremendous opportunities in the coming decade as India prepares to become $5 trillion economy.
In terms of micro, 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 too is facing intensified pressures due to the global interest rate trends, weakening global demand and high volatility in portfolio flows. Despite these headwinds, India has emerged as bright spot with GDP expected to grow 7% this fiscal. I'm very hopeful about a decade ahead as India stands to benefit immensely from the tailwinds of reforms implemented over the recent years, favorable demographics, ongoing digital revolution and realignment of global supply chains.
Based on the recent data, banking system credit growth looks healthy at 16.4 year-on-year. And we continue to see growth in digital transaction tools. Notably, uncertainty over rates and liquidity has risen significantly in recent months, while inflation still remains above the comfort zone of policymakers.
Coming to the AU, the last quarter was among the best quarter as a bank, where we got most of the things right. We have launched 37 touchpoints in this quarter. We grew our deposits by 49% year-on-year. Our CASA ratio reached 42% and CASA plus retail deposit mix reached 73%. Our cost of money was 5.78% for 6-month period.
I would like to congratulate the team for doing such a wonderful job of raising the deposits during the quarter without any increase in our deposit rates. The credit market also saw good pickup with festive season coming a bit early this year. The asset business saw a disbursement of INR 9,200 crores, growing 68% year-on-year and disbursement yields continued to see improvement. Similarly, the collection efficiency and asset quality continued to hold with average collection efficiency at 108% for the quarter and gross NPA coming at 1.9% and net NPA at 0.56%.
Our asset quality, which is one of our core strengths, has remained resilient across cycles and we are committed to maintaining pristine asset quality. The pandemic days reinforce our faith in our customer segment and we are convinced that we are serving the right customer segment. In fact, the asset quality of post-pandemic book is even better. 77% of our book was originated post-pandemic, where gross NPL is around 0.55%. Meanwhile, our balance sheet size grew by 46% year-on-year. Net worth grew by 49% year-on-year and our capital adequacy is around 23.4%.
In August, we raised capital of INR 2,500 crores with INR 2,000 crore of Tier 1 and INR 500 crore of Tier 2 bonds. LIT was launched amid challenging market condition and I'm overwhelmed by the support that we received from all the participants. I would like to convey my heartfelt gratitude to everyone who supported us. Thank you so much. This has enabled us further strengthen our balance sheet and allow us to continue investing for the future. Notably, this quarter also we got the upgrade from the third rating agency. So now we are AA/Stable for all 3, CRISIL, India Ratings and CARE. Thank you so much.
Our margin for the quarter expanded at 6.2% from 5.9% quarter-to-quarter, profit rose by 23% to INR 343 crore with ROA of 1.8% and ROE at 15.3% despite a higher capital base in Q2. This makes our business model very sustainable.
We've always been a customer-centric bank built on first principle of simplifying banking with a strong focus on delivering customer delight. I'm happy to say that we have added over 3.4 lakh customers into the AU family last quarter. Our brand campaign, "BADLAAV Humse" is furthering our reach. More on quarter highlights will be covered by Uttam.
Further, our tech-led business further our customer convenience, I'm very happy the way our credit card, video banking, UPI QR and AU digital team are shaping up to stitch together our tech priorities. We continue to invest in our tech-led businesses. Simultaneously, we are keeping a close eye on the tech infra to run the bank with cyber security as an important priority too. Gaurav will cover this in further detail.
In our sustainable journey of building the bank, robust governance mechanism has been the backbone of our growth since the beginning. I would like to say that the re-appointment of Varma sir, the Chairman, has recommended by the Board and has been sent to RBI for approval. 2 of our veteran Board members, Mr. Ashish Sir, and Madam Narang are due for retirement in March 2023, after a long, fruitful and very impactful inning at AU, for which we're deeply grateful. The Board will be joined by more independent directors in times to come.
We have built a strong leadership team at various levels and continue to invest in them, while attrition remains a challenge. But as this structure has further followed us to attract talent and facilitate leaders with ample space to express themselves, and build cohesive and motivated team, which also helps in succession planning. We are increasingly becoming an employer of choice and continue to do more every quarter on our employee engagement propositions.
The journey of last 5 years have cultured us towards pursuing holistic growth and development. We are working on every aspect, which makes us more purposeful from focusing on ESG to embracing diversity, from furthering financial inclusion to building a digital-first, which I think is a great equalizer for all of us. Further, the way we have grown in last 5.5 years has given us hope that we'll be able to manage the current uncertain environment and navigate through the unknowns. I would also like to share you our key learnings from last [ 2 or 3 ] quarter as a Bank.
First of all, we strongly believe that the platform is -- this platform is a public good, which we deeply respect and are building carefully. We are imbibing the key principles of banking of "Samajhdari", "Zimmedari" and "Imandari" [ in everyone who works here]. They're are not working with a quarter-to-quarter mentality and setting -- focusing on the long-term horizon which is required to build a bank of strength and predictability.
Governance is first, always first. We have put in place robust mechanism to manage our risks, which makes us more sustainable and trustworthy. More importantly, we are ready for short-term pains for long-term gains. And we try not to hit too short-term noises for long-term voice. And the way forward, in my opinion, the journey of AU for next 5 years would be more exciting as we are -- we not only implement the learnings from these early years but also benefit from new growth opportunities.
We are giving impetus on scaling the current account channel and focusing on SMF, Small and Marginal Farmers lending. To get a growing demand of ag products in the coming times, we are building our wealth management vertical. We have also decided to add ICICI Lombard as our newest bank assurance partner, I welcome them.
The way that regulatory landscape has evolved in last 6 months around digital and cryptocurrency is only benefiting the banking industry. Recently, the regulator also has allowed SFB to apply for AD1 license that [indiscernible] business and we are evaluating both as it will be a significant boost to our platform.
In the near-term, we navigate this uncertain environment. We continue to remain focused on executing our strategy, leveraging our strength of understanding the borrower's cash flow and assessing their business resilience amid challenging landscape. The current environment is not as severe as the pandemic, but we are keeping a close eye on the evolving situation and we'll calibrate our approach according to [ growing interest in similar matters ]. Specifically, we will be prioritizing, optimizing our cost of funds, consolidating our deposit franchise, preserving our risk-adjusted yields and continue our growth trajectory in a sustainable way.
Overall, I can assure you that as in the past, in everything we do at the bank, the endeavor is to build a highly sustainable and credible bank which is predictable, consistent.
In cricket analogy terms, which is near to my heart, we have managed to bat well in the initial overs despite some initial swing and see movements. And we are now in the middle overs, where the team needs to consolidate the innings to play long and to build a sizable scope. And inline, I am very thankful to all stakeholders, Government, our regulators, our Board, our customers, our investors, the analyst community, my team and all the unsung heroes for supporting and believing in us.
Thank you so much. I hand over to Uttam for the operational highlights. Thank you so much.
Thank you, Sanjay. Namaskar and good evening, everyone. We are amidst festivities, and I hope that the auspiciousness of this period rubs off on all of us. I wish you and your loved ones a very happy Diwali and prosperous new year. Over the last 5.5 years as AU Small Finance Bank, we have charted our course carefully.
I'm happy to share that in Q2 FY '23, we continue to deliver consistent business growth while keeping our margins intact. As Sanjay said, the focus is to implement the learnings of our yields as a Bank, to maintain our credit filters and quality of book, focus on granular customer acquisition, customer engagement, cross-sell and CASA growth. We continue to be optimistic about opportunities and align our strength for keeping our market position intact.
To start with, I would like to cover some key operational highlights for the quarter. In line with building a diversified presence, the Bank has made deeper inroads with 27 new touchpoints added this quarter, out of which 15 are liabilities branches. 8 of them being in our emerging markets in UP, South and East India. With a view to bolster customer acquisition in urban markets, 13 of the 15 liability branches are located in metro cities like Chennai, Bengaluru, Hyderabad, Kolkata, et cetera.
Maintaining our pace from the first quarter, we have expanded our deposit book by 7% in this quarter and increased our CASA ratio from 39% to 42% on a quarter-on-quarter basis. Similarly, our CASA plus retail TD mix now contributes 73% of total deposits. CASA deposits have grown 109% year-on-year, and 16% quarter-on-quarter. Against our reported increase of 190 bps, our incremental cost of funds increased by 70 basis points during H1 FY '23. And our overall costs reduced by 17 bps during the same period.
After avoiding raising rates for entire of last quarter, with effect from 10 October '22, we have increased the FD rates by up to 60 basis points for retail deposits, taking our peak rate to 7.5% for regular customers and 8% for senior citizens. With this hike, the Bank is offering one of the most competitive FD interest rates, thereby providing an opportunity to customers, particularly senior citizens to get inflation beating returns from their fixed deposits.
We have been focusing on improving the product mix, and cross-sell to customers with an aim to increase average balances. Our product per customer has reached 1.63 for saving accounts customers and 1.97 for current account customers, excluding dormant and BSBDA accounts. Our cross-sell efforts include disbursing 10,000 plus life and insurance policies, adding 8,600 plus 3-in-1 trading accounts and adding 12,000 plus mutual fund SIPs during Q2 FY '23. Additionally, during the quarter we disbursed INR 728 crores via cross-selling of asset products through our branch banking customers, a growth of 64% quarter-on-quarter.
Another key expect of our branch banking strategy is sourcing of quality customers. And in the last quarter, 66% of all savings accounts sourced by branch sales team, excluding salary accounts, were from premium category of Royale and Platinum accounts, up from 59% in Q1. We have just launched our newest product for our current account customers called Platinum Business account. This is a premium product with industry-leading features, designed to provide a lot of flexibility to our small business customers with plug-and-play features around cash, QR codes, digital solutions and pricing. This will provide added momentum to our current account journey, where 37% of our card customers already hold high value variant of our current accounts.
Our digital initiatives, AU 0101 App, Video Banking, Credit Cards and UPI QR have played an important part in improving customer experience and engagement. On saving accounts, our transacting customers have increased to 56% with an average of 28 transactions in a month. Further, approximately 72% of the current account customers were active on Internet and mobile banking in Q2. This reflects a shifting preference of customers for primary banking with AU.
Another engagement tool, AU Shopping Dhamaka is now in its fourth edition and is currently live with very attractive offers across platforms for this festive season, helping us engage more with our customers.
Moving to our asset SBUs, let me start by updating you on our wheels business. As an industry, vehicle sales in Q2 FY '23 has grown by 16% year-on-year with most segments displaying major growth, particularly the passenger and commercial vehicle segments. Our average ticket size is around INR 5 lakhs on disbursements and INR 2.6 lakhs at portfolio level, excluding 2-wheelers. This quarter, we disbursed INR 3,542 crores with an IRR of 14.29%, which was an increase of 35 bps sequentially. This also illustrates the ability and strength of our business model to transition price volatility.
I'm pleased to share that as of 30 September 2022, the wheels portfolio hit a milestone of INR 20,000 crores. Through 7.81 lakh live loans, comprising of 53% new vehicles, 35% used and refinance, 10% tractors and 2% 2-wheelers. Out of this INR 16,000 crores is contributed by the new book generated post April 2020, which continues to display robust asset quality at GNPA of 0.65%, in line with our expectations.
Overall collection efficiency for wheel business was 107% for the quarter. This also led to improvement in GNPA to 2.24% from 2.30% sequentially, and from 4.31% a year ago.
Moving on to secured business loans. As on 30 September 2022, our SBL portfolio stands at INR 17,471 crores with a weighted IRR of 15%, growing 22% year-on-year. We have 1.74 lakh unique customers with GNPA of 2.8% as on 30th September. This quarter, we added 12,000 plus customers with 76% new to bank with an average ticket size of INR 11.2 lakhs for a total disbursement of INR 1,459 crores, which has increased 49% year-on-year and 14% quarter-on-quarter. Collection efficiency for SBL business continues to be robust at 112%.
Moving on to the older but newest kid on the block, our home loans SB. Currently operates out of our 8 major states and our total actual portfolio was INR 3,365 crores as on 30 September 2022, a growth of 12% quarter-on-quarter. Our disbursement in Q2 FY '23 was INR 498 crores. Comprising of approximately 34,000 loans with an average ticket size of around INR 11 lakhs.
Our GNPA on this portfolio continues to be stable at 0.44%. Notably, being an affordable housing book, much of our book is also eligible for long-term refinance from NHP. Geographically, we are seeing greater demand from both urban and semi-urban rural areas, which remains strong with the onset of the festive season.
Commercial banking is a franchise business which we started on the banking platform and our 2 main product lines under this are business banking and agri-banking. On business banking, the portfolio has reached INR 3,837 crores as on 30 September, a growth of 18% quarter-on-quarter, with disbursement of INR 938 crores during the quarter. Further, our portfolio is 98.5% current and GNPA was reduced to 0.17% on September 30, 2022 from 0.34% as on 30 September, 2021.
Agri Banking business has reached INR 3,000 crores portfolio mark, and is growing with stable asset quality. This quarter we saw an incremental disbursement of INR 486 crores due to several conducive factors, including growing our footprint in newer geographies, newer product initiatives like financing to FPOs, which is Farmer Producer Organizations, have started contributing to the small and marginal farmer book of the bank.
Summing up, we are in the rising interest rate, where inflation is proving to be more resilient than initially estimated. We shall continue to monitor our competitiveness and calibrate deposit rates accordingly, with focus remain on garnering low-cost CASA and retail deposits. The festive season has historically accounted for good business in second half of any financial year and we are witnessing increased demand across most of the business segments this year as well.
We continue to focus on growing our asset business sustainably with yield optimization and keeping our credit filters intact. While we are bullish on India, we are conscious to not get carried away by return of the credit demand post the 2 years of pandemic. Till we ascertain if this is pent-up or a sustainable demand, we will continue to focus on our strengths and reinforce processes and [indiscernible]. To prepare for the next [indiscernible] of India, yet being watchful of the demand situation.
As always, we remain highly engaged with customers on ground to gauge demand and dynamically calibrate and optimize ourselves. I remain confident that our business model execution capabilities, optimistic about the opportunities and potential and yet watchful.
I look forward to sharing more with you in the coming quarters. I now invite Gaurav to share his thoughts on our different initiatives. Thank you and take good care.
Thank you, Uttam. Good evening, everyone. I will now provide an update on our tech initiatives, including credit cards and UPI QR. Tech remains an area of key focus for the bank and we continue to execute on our tech strategy with the objective of growing our deposit franchise, developing unsecured lending capability and building out our digital distribution. We soft launched AU 0101 in June '21 and did a full commercial launch in August '21 in the middle of the pandemic. Since then, our digital capabilities and key metrics have progressed significantly.
I'll take a moment to talk about 3 key highlights around digital adoption, acquisition and engagement. First, on digital adoption. Our digital adoption is 3x or June '21 levels with 14 lakh digital customers, of which 8 lakh are monthly active. 98% transactions and 90% of service requests are being executed digitally. Second, on digital acquisition. Customer acquisition through digital products has increased significantly, accounting for 42% of total customer acquisition in Q2, with 0% in June, '21. Since the launch, we have opened over 2 lakh accounts using video banking, issued over 3 lakh credit cards, disbursed over INR 500 crore of digital personal loans and installed over 8 lakh UPI QR.
Digital acquisition is also helping us lower our cost of acquisition. For example, digital savings accounts were acquired at 50% lower cost of acquisition compared to our branch channel, these digital savings accounts accounted for 38% of total savings accounts acquisition in Q2. Third, on digital engagement. Our digital proposition has also increased our customer engagement meaningfully. We have extended pre-approved offers to over 1.5 million customers since June '21, of which over 2 lakh customers took up the offer. Monthly transacting customers as a proportion of total savings account customers has increased from 47% to 56%. And average monthly transactions per transacting customer has increased from 17% to 28%, an increase of 65%.
I will now give a brief overview of our 3 digital units. First, video banking. Video banking as a distribution and service channel continues to improve with the aim of making 0101 plus video banking a complete replacement of a branch. In Q2, video banking team opened over 50,000 savings accounts, received around 80,000 servicing and engagement calls and increased total relationship value of digitally sourced savings account customers to INR 870 crore, an increase of 21% quarter-on-quarter. Average relationship value of a digital savings account customers stands at over INR 40,000. Combination of video banking in 0101 is also driving reduction in branch visits, with propensity of digital savings account customers to visit branches being 1/3 as compared with customers acquired through branches.
Moving over to credit card. We issued over 90,000 credit cards in Q2 and crossed INR 500 crore of monthly spend in September. Our credit card proposition is helping us attract new to bank customers with 47% of total cards being issued to new customers. We continue to innovate with new product launches. LIT, India's first customizable credit card, which was launched last quarter, continues to be very well received in the market and is now our highest selling card variant. Our key credit card metrics are inline or better than industry average, with 86% of our customers having activated their cards and 53% customers being 30-day purchase active.
Now a brief update on our merchant solutions business. During the quarter, we installed 1.5 lakh UPI QR, taking our installed base to 8.1 Lakh. With over 1.5 lakh daily transactions, UPI QR continues to help us drive engagement and deepening of our merchant customers. 85% of transactions by value were credited to linked AU CASA accounts. This has helped increase average monthly balances by 83% post UPI QR install. We are also cautiously building out our digital unsecured lending program for merchants. Total unsecured loan disbursement to merchants amounted to INR 86 crore.
In addition to customer-facing digital initiatives, which I just spoke about, we are also investing in a number of areas around digitization, core technology stack and cyber security. Some of these key projects include, upgrade of our core banking platform, which we expect to go live in the next few months; implementation of data platform, which would unify all of bank's data in one place and enable development of next level of analytics capability in the bank; implementation of a new loan origination system for wheels business on the Salesforce platform -- this would better equip our wheel's team for faster onboarding of customers; and finally, our cloud migration project, which would be an ongoing initiative for next couple of years and include both migration of selected existing applications to cloud, as well as onboarding new applications on the cloud.
To conclude, Q2 was another quarter of solid execution and we continue to progress in our digital journey. With this, I'll now hand over to Aseem for Q&A.
Thanks, Gaurav. Faizan, we can start the Q&A.
[Operator Instructions] The first question is from the line of Renish from ICICI.
Congrats on a great set of numbers. So sir, just couple of questions. One is on the disbursement number, so which has been stagnant at around INR 8,000 crore from last couple of quarters. And when we look at the sequential growth in the wheels and the SBL Portfolio, which is almost 75% plus of our portfolio, is around 2% growth. So sir, what is happening on the disbursement side? I mean, why it has been stagnant? And particularly within the segments, why wheels and SBL is still sort of showing the muted growth?
We don't think that our business disbursement as segment, because we have 1 yearly plan in place. And at -- by that numbers, we are growing every quarter and of course wheels and SBL both businesses had some size. And we have grown so much well in last 5 years. So we just want to take the whole, the risk management and the whole controls and all those things to really see that we don't build wrong book in a good time, right. So I think we are absolutely on track because we have lot many books to offer, right. We do wheels, we do SBL, we do home loans, we do commercial banking, credit cards. So we need to figure out, and that's why we started all those different products, so that we will have a very balanced growth, right. So absolutely on course of the yearly numbers. I would say that generally in the first 6 months, we do around 40%, 45% of business, right. So in that sense, I would say you will see a lot much growth happening in next 6 months, in comparison, right, in comparison. Yes. So that's the franchise we really want to build where every product want to contribute in the journey of growth.
Got it, sir. And sir, secondly, on the business banking and agri SME. So this book has been growing at a pretty faster clip from last 6, 7 quarters. So if you can just throw some light in terms of, let's say, the tenure and the kind of customer segments where we operate? Because when we look at the yield on the business banking, it is around 10%, 10.5%. So I would say it is 1 notch below than what leading private sector banks are tapping. So maybe if you can just throw some light on the customer segment, and the latest maybe the collection trend or any data point, which you can highlight?
Yes. It's Vivek here. So both business banking and agri banking, both are primarily working capital book and the average ticket size are for both vertical ranges from INR 80 lakhs to INR 1 crore kind of thing, right. So it has both fund base and non-fund base. It's a very pretty normal working capital business where most of the facilities are renewable at 1 year. It has a smaller component of CapEx loans, which typically are done through the sort of expansion or some equipment or machinery purchases kind of this thing. But broadly, it's a business where we also did lot of cross-sell opportunities within the same customer base, has good amount of deposits from these same customers, right. And as far as the yield is concerned, it is --- we have to look at from the spread perspective because these are low OpEx businesses, right.
Just wanted to add on your -- like these are not one notch below the other private sector bank customers, because you know lot much formalization has happened after GST last 5 years. And here also we are using our distribution, right, because you know we are more dominating the core, which is the semiurban rural areas. We have seen lot much formalization happen, people didn't have any kind of leverage on the balance sheet. But in last 5 years, their business has come everything on a formal side. They require cash credit and all those things. So -- and we are able to price the risk and we are able to actually price our positioning as a franchise.
So I would say that again -- I won't say that it's a below level of any private sector bank, because our net NPA and business banking book is around 0.16, right at the rate of 10%. So I'm very comfortable in this kind of positioning and I strongly believe that India in MSME and SME in like decade can be very -- will do wonders, will do wonders.
Got it. And sir, is there any geographical, let's say, concentration maybe business banking and agri SME, Rajasthan, outside Rajasthan, if you can give some data around that?
Typically, our asset business are distributed between Rajasthan, MP, Delhi NCR, Punjab, Haryana, Gujarat and Maharashtra. So that is where it is spread out. As new geographies are very, very new and wherever the branch banking -- because this business would need a branch setup right? So wherever the branch banking franchisees would progress, these businesses would follow the suite.
So, Renish, 2 points. On the first question, you have to also understand -- we also securitized about INR 700 odd crores during the quarter from the wheels business.
Correct.
So that will also impact the [ gross ] advances. And as far as what Vivek ji said that the entire business banking, agri banking, geographically, it could be very similar to the broader overall book.
Yes, that's what I just wanted to reconfirm.
The next question is from the line of Ratik Gupta from Guardian Asset Management.
Yes. So, sir, we have reductions during the period of approximately INR 234 crores. So I just wanted to understand how much will be the write-offs or the recovery from this, if you have the breakup?
This data has been given on Slide #26. We have done a INR 23 crore write-off.
INR 23 crores write-off, okay. And I wanted to understand if we have a deposit rate being fixed and with the increase in repo rate, we still don't see cost of fund at that increased level. So how -- I just wanted to understand a picture of it. So how is the incremental cost of funding going down while the repo rates has been increasing?
No. So incremental cost of funds hasn't gone down, right? Incremental cost of funds have gone up by 70 basis points --
No. Total cost of fund, I meant.
See, total cost of fund, there is a base effect, right. There is a AUM and the overall cost has been coming down for us, if you look at for last 2 years. So prior to pandemic, we were at about 7.5. Last full year, the cost of funds were about 5.95-ish. So an incremental cost of fund if you see, we started the year at about 5.3. So to that extent, it is just being a mathematical adjustment.
So lot of old money is still there, right, because of that, by cost is coming down. But if you will see when we started our year, we started from around 5.65, which is now 5.80. So in 6 months, our overall cost had increased but it since we have low cost old money in system, so that is why overall cost is still 17 basis points below than what it was in last year.
The next question is from the line of Prabal from Ambit Capital.
Congrats on the good numbers. So my question is on the [ high ] deposits. So very strong growth sequentially and year-on-year. But if we see the monthly growth in the balances as well, that is also very strong. So just wanted to understand what is driving this, the increase in the balances per customer or we are also able to see mobilization of more customers?
Yes. So Rishi Dhariwal here. See, we continue to acquire customers in our Royale and Platinum offering products, right, and which is what is finding good traction with customers. The second is that we have increased our branches in urban markets by almost 130 branches over the last 2 years, so which is what is making us to reach out to customers in newer geographies and the expanded distribution adds to our ability to source more and more savings account. The third is that the savings customer and the deposit customer are 2 very -- I mean they are 2 different groups of people. There are different groups of people who typically keep money in savings. The customer who typically book deposits are the ones who are senior citizens and people who want to save money for slightly longer term. So we have been able to sort of ramp up our savings account acquisition and which is what is showing the growth in savings.
Okay. And what would be our cost of our deposits, if you have the number?
5.5%.
Okay. Sir, and the question on OpEx front. So we have seen employee reduced, whereas our employee cost has gone up, I think 15% Q-on-Q --
Sorry to interrupt you, Mr. Prabal, the audio is not clear from your line. Please check.
Yes. The question was that we have seen reduction in employee, whereas the employee cost has gone up by 15% Q-on-Q. So what can explain that?
So obviously, employee cost is more a function of -- there's annual appraisals and those things happen. Predominantly for us, it happens in Q2. So that would be part of the reason. But nothing extraordinary there. Of course, in terms of overall capacity addition point of view, we had some excess capacity during the COVID days. So because of that, we have obviously been looking at, focusing a lot on productivity and rationalizing some of those manpower, looking at the overall environment. And then inflation has always played a role, right, because the appraisals typically would follow in this quarter, and given the inflation that's happening, given the entire talent crunch that's happening across, you would see a natural cost increase. So that's what it is, nothing else to read into it.
Prabal, Vimal this side. In addition to that, actually you are comparing the cutoff date numbers, whereas total cost paid for the employees is around INR 700 crore more than average of the last quarter. So that's why the cost is increase. So closing number has decreased by INR 1,200 crore number, but in average, it's INR 700 crore more than last quarter.
Okay. So is it fair to say that INR 450 crore number is not sustainable and can improve quarter-on-quarter from here onwards?
No. So, what we are saying is that ultimately -- see, the employee wage bills would typically follow the inflation cycle and the way the entire employee base is going to grow. What Vimal-ji just mentioned that the reduction in the employee base has happened towards the quarter-end numbers that you are saying. If this sustains going forward, then obviously you will see some amount of impact. But in case depending on the business environment -- requirement and how the overall environment shapes up, if we decided to further increase our hiring, then obviously that will also have an impact, right? So we'll have to see how we go along.
Right. And on the other OpEx, so any target on the cost to income net, because now that is almost around 4.5% -- total OpEx is 4.5% to average assets. So I understand --
Sorry to interrupt, Mr. Prabal. Please use the handset mode. The audio is not clear from your line.
Prabal, if I understood your question, cost to assets is typically something that we don't track. We track cost to income ratios, which we have already talked about in the presentation and also given a guidance and touched upon in MD speech. It's definitely outside of our comfort zone and we are working on it and you would see there has been a reduction quarter-on-quarter and we'll continue to do our best to bring it down to our guidance range of about 62-odd percent.
And the 62-odd percent would be because of the improvement in income and not because of the reduction in the cost of the investment [ return ]?
No. Both actually, because in the first quarter also, if you see there was an impact on the income, right?
Right.
The next question is from the line of Anusha Raheja from Dalal & Broacha.
Yes. Over the next 2 to 3 years, when you feel that operating leverage will kick in and you will have material reduction in the cost to income ratios?
I think -- I'm Sanjay this side. So again, you know that there are so many unknowns in last 2 to 3 years, right, due to pandemic and now also you're seeing lot much uncertainty around the future growth. But we as a Bank need to always capitalize ourselves to really sustain, right? So if you ask me that whether we will have an operating level 2 to 3 years, I would say, let's give us another 3 to 5 years, right? Because in that time frame, we will have a sizable business in place, there will be more knowns in place. And so I think -- I would say not 2 to 3 years, but maybe in 3 to 5 years, you will see operating leverage helping us to build a better ROE.
I mean, definitely you are in an investment phase currently and that's positive, but any number to put up over the next 3 years, what internal number that you're looking at or any ball mark number to put there?
Give us some more time because it's difficult to predict as of now because of this continued inflation. We are into investment phase. Our credit cards business, video banking business, the whole tech business is coming up to a size and shape. So I think it's difficult to predict, to be honest. But we are not out of the course. We are not running a very high cost around it. If you take our investment cost out, we're around 55%, 56%, right? So I would say that next 2 to 5 years, we'll have some kind of operating leverage there, but it's difficult to put a number around it as of now.
[Operator Instructions] The next question is from the line of [ Dhaval ] from DSP Mutual Fund.
Congratulations on the good set of numbers. I just had 1 question relating to the PSLC income. So in general, like for the first half, we've seen a very low number. So could you just comment what is driving this run rate and if you could give some [indiscernible] year?
Yes. Dhaval, Yogesh this side. So PSLC is just a typing market sector, and every quarter we see market, our market is behaving what are the rate premium available. So if you will see, second quarter, premiums were very muted. Micro and general were happening on INR 0.02, INR 0.01. So we decided [indiscernible] and we'll see next quarter. So we have PSLC portfolio of relevance, but since rates was not there, we'll figure out in next quarter. But as we mentioned in our presentation that we securitized some of our portfolio to get some rate advantage. So we will balance between PSLC and securitization going forward also.
Understood. And the second half, should we typically -- like significantly better than the first half in terms of PSLC?
There is no pattern or benchmark, because earlier second quarter was better last year. So there is no benchmark. We'll see each quarter and then accordingly we'll figure out.
The next question is from the line of Darpin Shah from Haitong India.
Yes. Many congrats on the quarter. So my question is towards growth. Now while we're talking about uncertain times and preserving our yields and consolidating deposit franchise, should one assume that even the loan growth from here on will moderate or will still continue the way we have seen AU in the previous years?
So I would say that that's why we call it uncertain time because you're are not able to predict. So -- and there are certain headwinds like inflation, interest rate raise, liquidity, right? And you know that our asset growth is driven by the deposit growth. We can't grow asset on its own, right? And deposit is pricey now. So we don't want to raise money at any cost and want to land at any kind of low rate. So we really want to protect our names and our ROE and ROA.
So that is why we are saying that we want to really see that how we -- how the growth happens, that has to be profitable, it has to have some kind of numbers around it, right? And as I told you that generally we do 40% to 45% of business in first quarter. That makes a very healthy growth rate in this year itself. So there is a demand, but we just don't want to rush ourselves because I strongly believe off my experience of 25 years, 26 years that bad books are built in good times. So that, we don't want to do anything like that. And so there is growth, but we don't want to say that we really want to grow out of back, right. So that's our positioning. But we are growing well and we believe in that any sustainable, reasonable growth can be manageable and sustainable.
Okay, great. Just 1 last data-driven question. How much was the slippages from the restructured book during the quarter?
That was INR 58 crores.
The next question is from the line of Nilanjan Karfa from Nomura.
Just 2 set of questions. So, sir, I mean, it just seems to me you are being a little more cautious. Quite a few times we heard building bad book during good times, which is a fair comment. Therefore, just trying to get a context of what kind of growth are you actually looking at for this year and maybe the next year as well?
So I'm just repeating that. Generally, we do 40%, 45% of our business in H1 and that makes us around 12%, 13% growth itself. We have already delivered, right? So if you mathematically calculate it, it will be around 27%, 28% kind of growth this year. And my point is not that we don't want to grow in that abstract. Anything around 27%, 28% or even 30% is good enough. But you know idea is to really grow at some kind of strategy because we can't raise money at any cost and we just don't want to lend at lower rates, right? So we really want to protect our names, our ROE and that is why we are saying that there is enough demand available. The demand has to be profitable for us. And in past, we have done that. Even in my NBFC days, there was a good time, but we never ever gone to the market demand, right? We always tried to build our own strategy and work upon those lines.
So my sense is that we are on right course, we have a very long-term vision to build this Bank. We need to see the cycles. The team needs to understand, team needs to hold on and see through every up and downs of the Bank journey to really become a more long-term franchise, right, which makes you very sustainable and predictable.
Sure, sir. If I can just kind of expand the question. I mean, is this something in the environment that you are a little worried about? That's the question I wanted to ask.
So like in my opinion, if inflation remains like this, right? And there is an elevated interest rate, right. And then it will leak up your wallet, right. So how the people will pay the EMIs. If suddenly the crude goes up to INR 120 billion, INR 130 billion kind of barrel, right, then what we should do? Because we have -- we are running a vehicle book, we are running a SBL book, right? So we need to be cognizant of this fact that how inflation remains for next 6 months, the policy makers are doing their best, but the demand is like this. So what I want to say is this, that, why you really want to overgrow? Let's grow sustainably. So when you have a lot much demand, you can pick and choose, right. So we are doing that. And in that, we really want to calibrate ourselves. Let's price our rates, let's understand customer more. Let's see that even on a high inflation, high interest rates cycle, whether he is okay to pay his EMIs, right? So I think that kind of understanding we are building internally.
Perfect, perfect, sir. The second question is I don't know if you will be able to share. In the fourth quarter, we did that OpEx movement between '21 and '22, split out between 3 or 4 different components. Possible to get it in the first half, how this has moved?
We have given that data. I mean, not in so many words. But the number is definitely there. It is on Slide #15, around INR 125 crores of the incremental expenses have been towards the investment and the breakup is there on that slide, that's for Q2. And similarly, you can find for Q1 in the Q1 presentation.
The next question is from the line [ Shaartak ] of an Individual Investor.
My question is to Sanjay, sir. So can you give me approximate expense towards the fund raised, and what ROE would have been barring this exceptional item?
So I think it's specific data, right? You want specific data?
We have already disclosed our --
May be approximate would do.
No, no, Shaartak, the exact number is already disclosed in the placement document that is as per requirements of SEBI. So broadly, it was around 1%, if I remember correctly. Just a tad above 1%.
Okay. Around INR 20 crores, you mean to say, right?
Yes, INR 23 crores. INR 23 crores, if I remember correctly. [indiscernible] account.
Okay. My question is to Sanjay sir. So see, I being retail investor, it's very difficult for me to calculate each and every moving item in P&L. So I just want to get a sense that what our sustainable ROE would be for like 2 to 3 years? And then once operating leverage kicks in after 3 to 5 years, can you just give a sense, a number, a range?
So I would say that you have to see our last 5 years working. That gives you enough guidance because we always remain north of 1.7 to 1.8 of ROA, north of 15%. Initially, our journey of last 5 years, right? So Shaartak, to be very honest, there are so much moving items, like how the interest rates will play down. We invest in our so much of digital capabilities, like pandemic happened and also -- and there are not much unknowns which can happen to us in next 5 years favorably, right?
So if you ask me specifically, it's difficult for me to comment, but I think last 5 years number, data should give you confidence that this franchise is very sustainable, because we have figured out the asset franchise, where to lend, at what rate we want to lend, what our NPAs can be, because what not we have seen in last 5 years. So I think our asset franchise is very solid and very strong. Our deposit franchise last 3 years has completely gone through a complete change from a wholesale franchise to retail franchise. So that is also enabling us to manage costs in spite of this inflated rate. And then again our digital properties are coming up well. So I think all put together, I strongly believe that anything what we have achieved in last 5 years should be there on table, right? But anything can happen better from here.
Wow. So maybe once operating leverage kicks in, 2% plus ROE is also possible, right, 2% to 2.2%, 2.3% something like that?
Difficult to comment for me, but let's hope for the best.
Okay. Maybe I'll take a hint from that. Yes.
Yes. Thanks, Shaartak.
[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to Mr. Aseem Pant for closing comment.
Thank you, everyone, for joining us and for your support. On behalf of the entire AU team, we wish you a happy and healthy Diwali. Please reach out to the IR team for any further questions.
Thank you. Ladies and gentlemen, on behalf of AU Small Finance Bank, that concludes this conference call. Thank you for joining us. And you may now disconnect your lines.