AUBANK Q2-2024 Earnings Call

Operator

Ladies and gentlemen, good day, and welcome to AU Small Finance Bank Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Prince Tiwari, Head, Investor Relations. Thank you, and over to you, sir.

P

Prince Tiwari

executive

Thank you, Michelle, and good morning, everyone, and welcome to AU Small Finance Bank's earnings call for the second quarter of FY '21. We thank you all for joining the earlier 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 does have tweaked the format for today's call event.

After providing you with brief commentary on the quarterly results, I'll invite our Founder and MD and CEO, Mr. Sanjay Agarwal, to share his thoughts on the proposed merger and the way forward. In the interest of time, I have requested Tanhaji to kindly skip his business highlights for the current quarter. And post Sanjay's comment, we will straight away jump into the Q&A session with the participating analysts and investors. Apart from Tanhaji and Sanjay, we also have a few senior members of our management team on the call today to answer any questions that you may have.

With that, let me start by sharing some of the key operating highlights for the quarter. The overall operating environment for the quarter continued to remain challenging with uncertainties around geopolitics interest rates and inflation, we all know about it. When the India looks quite good, overall festive demand holds and consumption in the rural and urban looks quite okay, supported by government card CapEx.

However, on the liability side, we continue to see competitive pressure amidst tight liquidity and higher inflation, leading to higher interest rate and persistent interest rates. In this backdrop, our second quarter performance remained consistent with the expected outcomes, and we are navigating the headwinds quite definitely.

Some key highlights for the quarter. We onboarded 3.6 lakh new customers during the quarter, and our total customer base has now reached 45 lakh customers. We have crossed a landmark of INR 75,000 crores in deposits and INR 1 lakh crore in asset 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 quarter-on-quarter basis. However, as I talked about, due to tight liquidity and higher pressure on the interest rates, 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 managing the cost of funds. We continue to lay strong emphasis on CASA and retail deposits. And one key thing we have changed is during the quarter, we have created a new banking unit called Forest Banking to maximize organizational effectiveness and focus on the upcoming semi-urban and 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-Citizens to 8% and peak savings account bucket at 7 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 year was 6.64, which is 87 bps more than the September '22.

While our costs have gone up, our overall yields have remained flat, and this obviously has some pressure on margins. But what we would like to emphasize is that yield flattishness in the yield is more structural in nature as we move towards a more credit cost -- lower credit cost business and more better risk customers profiles.

Our NIM for the quarter was 5.5% and 5.6% for the first half of the year. This changing mix, where we are moving towards lower-yielding franchise businesses like business banking, agri banking, home loans, we'll continue to put pressure on margins. As I said, it's structural. However, these business are also better credit quality and offer savings in terms of credit cost and OpEx vis-a-vis our traditional businesses of Wheels and SBL.

On the overall NIM, we continue to remain within our guided range for this particular year. Our advances growth for the quarter stood at 2% and on a year-on-year basis, we grew about 24%. However, we did securitize INR 2,922 crores of loan assets during the quarter. Gross of securitization, the loan book growth stands at 5% on a quarter-on-quarter basis.

63% of our loan book is now fixed rate and 37% is floating. So fixed rate retail book will be advantageous once the interest rate cycle turns. A key thing to note is that we continue to see uptick in our disbursement yields. After increasing our disbursement yields by about 28 basis points last quarter. We have additionally -- our disbursement yields have gone up by 27 basis points in the current quarter as well.

Taking the total disbursement is up by 41 basis points over the last year half year compared to FY '23. The Wheels business, which saw a disbursement about INR 3,689 crores. The disbursement IRR was upwards of 15% at 15.06 an increase of 77 basis points on a year-on-year basis and 40 bps sequentially. This is expected to help the margins in the coming years as our lower yielding book created during pandemic in some of these businesses starts receding.

Additionally, we have expanded our traditional SBL business to add near products like business loans for entrepreneurs in rural and semi-urban areas offering cash flow back loans without collateral and under the government guarantee program. We have also rebranded our SBL function as micro business loan as is synonymous with the MSME growing requirements across MSMEs.

The asset quality trends continue to remain normal and within the range. While during the quarter, the gross NPA increased by 15 basis points to reach 1.91%. 8 -- almost 8 bps of this increase can be attributed to the base effect due to higher securitization volumes of INR 2,922 crores during the quarter.

We assure you that this is our feedback from the ground, 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.

Our quarterly fee slippages, we also get comfort that our quarterly slippage ratio has remained similar to last few quarters at about 2%. However, as we exhaust our contingency buffer, which was created during the COVID time, our credit cost has started to get normalized.

We have a conservative policy in our unsecured lending, where we provide 100% on 180-day past due. So some amount of increased credit cost is on account of write-off from credit card book as well as that book grows and as we expected in the normal course of business.

The PCR on the overall book continues to be at 73%, enduring technical write-off, and bank still has about INR 96 crores of additional provisioning or provisioning in the form of contingency and standard restructured assets.

In a nutshell, we expect the asset quality to remain within our range with no specific pocket of stress or any early warning signals so far with recovery expected in the second half of the year.

Coming to our cost to income, our overall cost to income for the quarter was 61%, down by 4% from Q2, and we continue to focus on efficiency and headcount efficiency. Our cost-to-income ratio remains a key monitorable. And for the full year, we expect to be -- to land somewhere very similar to last financial year.

Our NII growth for the quarter was 15% on a Y-o-Y basis and thus, net profit increased to INR 402 crores, an increase of 17% on a Y-o-Y basis. The resulting ROA and ROE stood at 1.7% and 13.9%, respectively. The bank remains well capitalized with a capital adequacy ratio of 22.4%.

The core PPOP growth, a key measure, which has been monitored by analysts and has been one of the biggest concerns has surged to 28% on a year-on-year basis and 20% on a quarter-on-quarter basis. And this is supported by other income from credit card and distribution of third-party products, and we believe that this is structural in nature and not a one-off.

To prepare ourselves for our next phase of growth, we have also reorganized ourselves into 5 businesses growth, which will support the existing SBU structure. The first one is urban branch banking, which will focus on catering to urban affluent market and customers. Second, as I said, for Dish banking, which is -- and the club with government and wholesale deposits, which will focus on rural banking, financial intention and impact banking strategy. Small and marginal farmer lending and financial and digital inclusion has been embedded along with this for is banking.

The third large group, which we have formed now is retail asset growth, which continues to have our key retail lending businesses, which is Wheels, micro business loans and home loans as they are all under 1 umbrella for building synergies and leveraging benefits, as they share similar geographies, customer profiles and behavior.

Fourth is commercial banking, which continues to operate for lending books across business banking, aggregate banking, real estate and NBFC lending. And we are expecting that with the operationalization of our AUM license by the end of this financial year. Trade and transaction banking will be a U.S. addition to this growth.

The last sublease is the digital banking group, where all the digital businesses initiatives for the bank like credit cards, Pitre, QR codes, merchant lending, personal loans, video banking, AUR101 have been brought under 1 umbrella and all leadership to align strategy and bring synergy under the leadership of Mayank.

Notably, our digital products continue to scale. Our credit card business has now reached INR 7 lakh crores -- a INR 7 lakh plus live credit card with monthly spend of INR 1,350 crores. Additionally, we opened 54,000 savings accounts via Video Banking. We went live with our Wheels origination lending system in collaboration with Salesforce and FICO. And are -- 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%.

In line with our philosophy of Badlaav Humse Hai, we did launch our new brand campaign sourced by lower bank B. featuring our brand Anastasia Advani. This campaign was strategically designed to align our objectives of teetering to evolving aspirations of our customers and role of women in financial decision meeting.

We also announced our partnerships with Max Life Insurance, Bajaj Alliance Insurance -- Bajaj Alliance Life Insurance, Star Health Insurance as Bancassurance partner to further strengthen bank third-party products offering to its customers.

We did -- among the key product launches after the super success of IV premium lead banking program, we have introduced Zenith+ credit card, a super premium metal tread card program offering luxury and convenience accompanied by a range of exclusive benefits.

We also -- on the world sustainability there, the bank became one of the few first banks in India to launch a green fixed deposit fully compliant with RBI's latest framework on green deposits. And this has been assured by CRISIL. We request all of you to kindly open green deposits and make your contribution to the environment.

So all in all, we continue to focus on executing on our strategy for March '27 by emphasizing on building a brand, by providing a complete suite of products and gaining trust of all our stakeholders. Our latest announcement is a step in this direction, and will make us complete as a retail bank across products, geographies and customer segments.

To talk more about our announcement, I now invite our Founder and MD and CEO, Mr. Sanjay Agarwal to share his thoughts on the merger announcement.

S

Sanjay Agarwal

executive

Yes. So 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 the technology. And are putting our best foot forward to handle challenges, uncertainties due to macroeconomic environment.

Now I will speak about the transformative merger we announced last time. As an institution, we have come a long way from our numbers and ground of being in BAC to becoming the largest small finance bank in the country. Throughout our journey, we have believed in the region of becoming one of the world's most trusted retail bank and have been governed by our terms, which are a reflection of who we are and what we stand for.

Another situation, which started in Germany in a similar fashion and has built up ground up its Sinksmall Finance Bank. Sincere has witnessed remarkable growth while pursuing an inclusive business model and created immense impact on lives of millions of people at the bottom of the permit. I'm absolutely delightful and thrilled to announce the coming together of these 2 strong, established and then governed SMB franchise with a common charter of promoting financial inclusion.

This is just not a merger or 2 entities. It is a union of shared values, common growth and a vision for the future. This is an all-stock merger with AU Small Finance Bank, merging into AU Small Finance Bank, and shares will be issued to all Fincarsmall Finance Bank shareholders as per the agreed sharers. The merged entity will have around 1,000 net touch points, serving over 98 lakh customers through 43,000-plus employees.

I always share my thoughts on why this merger makes a lot of sense for our bank, and what capability it would bring to the franchise. First foremost reason is around is extremely strong and experienced management team led by the deal has been around for many years since case BCDs and has shown remarkable resilience with a building the business from the ground up.

InCare team have a deep understanding of the MFI segment, along with a strong connect on the ground, a trait, which we share and value very highly. This has helped them face multiple industry-level challenges over the last few years.

Second -- second point is around the complementary nature of business, both in terms of geography and the product. The addition of inks touch point would accelerate buildout of our pan-India distribution network through doubling of touch points from 1,000-plus to now 2,300 across 25 states and UPIs. This would significantly increase our presence in South where 49% of NK touch points are located, and add significant results since Aminado, Karnataka, Andhra and Pengana along with UPM B.

Post merger, over time, we would convert Finka's smaller MFI-focused branches into AU asset centers and expand product offerings. Merger would help diversify our product portfolio with access to ruler impact and inclusion focused MFI business and gold loans.

Temenos admit that add a different view in MFI business previously. However, the industry has proven its resilience over economic cycles. It has been much stronger with reforms and regulations and having faced multiple challenge over the years.

So promoting financial inclusion by catering to unserved and underserved segments of society are key offset to SMB. Lending to small and

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care will provide us this capability. Merging with an MFI on a bank platform made more sense from our perspective given common regulatory and compliance opine. Sincere is a well-driven bank with a strong gold and market private equity investors.

MFI has grown a CAGR of 32% over the last year -- last 10 years, actually, the strong India strong and widespread -- it's not in growth, and I believe that the industry is poised for a sustainable growth and profitability. Hence, we take this to be this.

Finally, in my opinion, MFI has one of the most experienced MFI in the country with a strong collection expertise and ability to sustainable growth business.

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. We have also looked through segment profitability and credit cost in the sector and we believe, MFI can sustainably produce ROA of 3.4% on a tough cycle basis with credit cost of 2.5% to 3%. We will provision the business conservative on through the cycle basis.

Along with the MFI capability, we also benefit from Finka's gold loan capability, which has grown -- which has a gross advances of INR 1,100 crores and

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the merger also brings multiple synergy opportunities from funding cost and a scale-driven cost in it. This is not a cross-cutting but benefit that accrues from a scale and reduction in future hiring requirements. Intel strong IT deals development capabilities around process utilization. This would further add to our tech capabilities and complement our strong customer-facing applications.

Finally, I think in case size is either in terms of integration, neither too small, not too big to integrate. Rajiv will be appointed Deputy CEO of USB post-merger. We will continue to lead the Finter unit with the. Additionally, he will jointly lead the IT and digital unit of AUSP along with me to ensure smooth IT integration post merger.

Detailed plan of operational integration would be worked out post completion of merger. We have onboarded A1 to help us with the HR aspect of integration 2. As always, with M&A, there could be some challenges as we integrate the 2 businesses, but I feel there are more knowns than unknowns.

So we have -- so and I just want to assure you that will make everything in terms of a better integration to put addition so that we emerge as a very strong franchise in coming years. And also want to assure that we are absolutely on close and remain confident of delivering our March '27 strategic agenda.

Thank you so much. Good to go, please.

P

Prince Tiwari

executive

Yes. So Michelle, we can now open the call for question and answers.

Operator

[Operator Instructions] We'll take the first question from the line of Bhavik Dave from Nippon India Mutual Fund.

B

Bhavik Dave

analyst

I hope I'm audible. Sir, 2 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 the process that the way we were going about since over the last 3, 4 years and having 20,000 more people, very different culture maybe. How do you think about it and now becomes a reasonably large part of our business versus the way we used to run a more secured franchise. How do you think about it?

And second question is, sir, on the competitive intensity -- on our main business. And when we look at this quarter, the yields have remained quite stagnant, and we have like delivered a reasonable price balance sheet over the last 3, 4 quarters as well. So is there a competitive intensity that is leading to yield not getting fast on to the customer? Or if you can just throw some light on what's happening on the yield front, wherein your margins are like down to 2.5%.

So these 2 questions, one on EU and second on merger.

S

Sanjay Agarwal

executive

Yes, Bhavik, let me answer the first one. So as you know that we are -- in my opinion, we are -- one of that franchise has become not much stable, not much having a confidence in last -- maybe 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, right? It is about the availability. It is about the opportunity of that time, which we need to understand and decide, right? And as you know, that the overall objective of at SMB is also to create an impact in the overall customer across segments, right?

And we were missing the macro finance as a subset from last maybe now 28 years. You know that I had my own stand around the MFI business and, of course, the overall unsecured piece, but we need to evolve our sales, we need to understand the risk around it. And we have seen that through cycles, the last 10 years, the MFI business has cost us around maybe 3% kind of credit cost, including the one-off events every 5-year side.

So I think if you understand that, we being in a bank franchise, we have a cost of an advantage. Tinker is more of a south-based franchise. We are more of a Northwest franchise. So it's complementary, right? So it's complement in terms of geography, complement in terms of project. It's not -- anything is not overlapping. And as I already commented that size is amazing, right? Because the size of K is around what of 20% of our site. So I think this way I want to sum up that, that is one of the most -- I am very excited and thrilled because it will add on to our order train, it will add on to our geographies. It is well governed. It is bank. And we as a team also have to learn how to do all this kind of integration, all these kind of challenges, how you should manage these kind of challenges, the communication and everything.

So -- and you know that what we have already done over the years should give you people have confidence that has the ability to manage this kind of transition also. And of course, we haven't took a lot too much time to decide this. I started -- we all started understanding this business for last maybe 2 quarters. And I think I should give my team and the MFI team and entire people who handle this transition so swiftly and so smoothly that we are able to announce in this month only, right?

So that is there. But I think I would say that a lot, much around operation data we share, but I'm absolutely sure that AU team will deliver along with the increm team maybe next 6 months, an amazing franchise, which can last forever. And so that's there. Of course, the overall competitive space remains I would say, more challenging in a term that, of course, there is a huge credit demand there, but there is an intense competition around deposit franchise.

Every bank is looking to build their own and we, as a bank, are also in the same course. We are also putting our best foot forward to raise money at a decent rate. But sometimes market doesn't allow you, but I think in terms of our product offering, communication, customer focus ability, so that is there.

So I think it's a testing time for us. And I strongly believe that we will sail through it. 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 noisefully. We should remain focused on our execution, we should remain on course in terms of achieving everything in terms of asset growth, asset quality, digital, digital franchise.

So overall, I'm very happy with the way we are building us. There are little hiccups, but we should manage it because it is beyond our control.

B

Bhavik Dave

analyst

Right. Resonate, we've not been able to set higher. So my question was more on that. Is there a competitive inventory too high? We like in franchise, we are going towards better quality customers. In fact, in to yield dropping. I see every segment are increased on a Y-o-Y basis, but the overall yields tend to not increase. So just on that perspective, it open to some light.

P

Prince Tiwari

executive

So Prince here. Again, what you are seeing today on an overall basis, like as I said in the call in the opening remarks as well that we have been able to increase the disbursement yields in some of the core businesses, right? The vehicles has gone up by 77 basis points over the last year. Similarly, the SBL also -- while we have not really been able to increase disbursement needs, but the profile is changing. But I think fundamentally, what you have to appreciate is the structure of the business, right?

The commercial -- the overall business construct is changing a bit and which we have articulated in earlier calls as well. If you go back to March '22, our overall lower ending businesses, which we are calling commercial banking and home loans, which yield about 11%, 11.5%. That used to be about 23%. As on date, as of September, it has now reached to about 31%. And consequently, there is a mix change that's happening in the business. The higher ending businesses of fees and SBL or MBL are coming down, where as home loans and commercial banking has gone up.

But we have also articulated in Slide 30 of Q4 FY '23 that the lower yield doesn't necessarily mean a lower ROE, right? The credit cost in these businesses is much, much lower. The OpEx in these businesses are much, much lower. And to that extent, if my retail business gives me an ROE of about 3.3%, on an advanced basis. The commercial banking also gives us about a 3.3% ROA, right, and which is already there.

One last thing I'd like to articulate is even within the existing businesses like MBL and Wheels, can view our personal car segments have gone up. In NBL, our ticket sizes have gone up post-COVID. So earlier, if you look at March 2021, data are more than 10 lakhs, ticket size is used to be about 56%, and that's a lower ending book compared to less than 10 lakhs, where you have more options to price better.

This book, we have now increased in the new disbursement as of March of '23. 71% is more than 10 lakhs and lesser than 10 lakh is only 30%. What we also realized is in cohort is the vulnerability of the customer who is overleveraged and has a smaller business, tends to be more risky as compared to people who have a higher borrowing and thus have a more second business, right?

So I think structurally, you will find that our credit cost, which used to be about 1% -- 80 basis points to 1% through the cycle will now probably stabilize at about 50 to 60 basis points as we move forward. And that's also an impact of the -- so while we might not be able to increase overall cost is -- but definitely, there is a saving in the credit cost.

Last point that I will make on that is also the Wheels and SBL, mostly Wheel. Some of the business that we created during the pandemic time because there was abundant liquidity and that business will get created at -- because we are very cautious that credit filters were too tight. We did create a business, which was slightly lower even as compared to historically where we have been. And that book is ensuring that even though the newer disbursements are happening at a higher yield, that book will slowly start receding now.

And probably going into next year, we'll start seeing some uptick in the yields. So hope that comprehensive, Bhavik.

Operator

We'll take the next question from the line of Renish from ICICI Securities.

R

Renish Bhuva

analyst

Sir, just 2 questions from my side. One is on the the income part, wherein the genial banking sale, has seen a very sharp jump in Q2 from INR 55-odd crores to almost INR 150 crores in Q2. So can you please throw some light on what is driving this sudden comp in this income line and whether this is sustainable or not?

S

Sanjay Agarwal

executive

So it's a sustainable basis mainly. It's related to insurance, where we have the other insurance partners and our insurance income. Insurance business is also increasing. And also the -- there's a core. If you see, Renish, the credit card fee I mean we have been saying this all along, right? Almost for 2 years.

P

Prince Tiwari

executive

Yes, and the 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 81 office lines, you will see not much other income coming in. And you know that once we get customers on board through our brands banking franchise, you need to cross-sell them so that the relationship become more deepen and the addition also become more fruitful guide. So I think as we move forward, and there is a rationalization around the other industry also in terms of the government and the compliance. That is also helping us. So you will see not much other income coming up and it will be sustainable and more predictable.

R

Renish Bhuva

analyst

Got it. Got it. So I mean, this quarter, there is nothing new, which...

P

Prince Tiwari

executive

We have done in just the past investment started in the results, right.

S

Sanjay Agarwal

executive

We haven't sold any P also. So there is no one-off. And as we move forward, post this merger, we will have an ability to have more PSL book and then we'll have the ability to have more peace income, too.

R

Renish Bhuva

analyst

Got it. Sir, actually, my question is on the one line item, which is general banking and deposit-related fees, which has gone up from INR 55 crores to INR 130, which is where things online.

P

Prince Tiwari

executive

Yes, captures the cross-sell third-party distribution as well.

R

Renish Bhuva

analyst

Okay. Okay. Got it. And sir, secondly, again, on the merger part. So the employee addition is close to 20,000 wherein, I will say, which is similar to our size as of now. So once we start the integration process, there will be a lot of management bandwidth, which will go into this integration part, whether it is HR or type integration. I mean does that for the risk of some growth development and the stand-on.

S

Sanjay Agarwal

executive

So no, I think good question, Renish. So let me address 2 things first. like Prince just announced that we already built business units, which is around urban banking, Sudesh banking, digital bank, retail asset and commercial banking. And we have built it not yesterday, and we are doing it from the last 6 years. And the whole purpose to build these business units are to bring more effectiveness, more focus. And the leadership itself takes care of their own bandwidth and their own agenda and their own commitment to us an overall organization alignment.

So I don't think that there would be any derailment because largely when its team is also very capable. They are doing this business over the last what, now 20 years. And the more I lead them, the more I get confident that steel has also not only perform in good days. I think this team has actually built their businesses through bad days and very lows of the industry, right?

So they bring that resilience, they're fighting spirit on table, which AU is known for. And I think we don't want to integrate that in the sense that it's -- it will be like a Sinclair unit in a bank, which will take care of their own business. Of course, there would be some necessary alignment right around liability franchise, maybe around the control functions. But I strongly believe that Fincare Bank will become once unit, and they will continue to work as usual. So I think there will be any such bandwidth issue with the business heads of EU.

Of course, the back-end people, me and the other leadership need to give them some time to have that belonging as to have that communication, that coordination so that it becomes a very smooth integration. And just for a data sake, it's not about 20,000 people. It is about -- around about 50 ,000 people, and we are at 30,000 people. So they are 1/3 of us. And most of them -- most of these 3,000 feel, maybe around 2/3 of them are in MFI segment, which we don't have, right?

So I think that is why I'm saying that it's more knowns than unknowns. Completely complementary in terms of geographic, product, people and the way we have thought through. If people will have, I know the ITs and because of the track record of so many M&A. But I can assure you that, again, AU will build one of the -- we will try to build or we'll practice show that this integration, this M&A can be so different from the previous ones.

And that's our commitment. That's our commitment to ourselves. And I think me and the Rajiv are bent upon to dissect on those lines.

R

Renish Bhuva

analyst

Got it. I guess just last thing. Sir, does this merger we had any impact on cost, maybe over the next couple of quarters?

S

Sanjay Agarwal

executive

No. So I don't think that there will be any additional cost. As I commented that there would be some synergy, but it will be only in next maybe 2 to 3 years. But I don't think there is any additional cost. There would be one-off costs like transition around time duties, maybe a retention bonus and all those things, but it will be taken care by -- we have built it in our future ROE expectations.

Operator

We'll take the next question from the line of Rohan Mandora from Equirus Securities.

R

Rohan Mandora

analyst

Sir, if we look at AU Bank, it has had certain strength in that business model, which has enabled you to deliver strong performance over the years. So just want to understand when you're evaluating this transition what as per you as the key strengths in the business model of Fincair 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 and that was one.

And second, sir, second question here is that we have been following a continuous expansion strategy as we were expanding geographies now with Suncare, while South geography gets added, but the product profile was relatively different. So we probably don't have that understanding of the geography. So does this expansion, will it take time to drive operating synergies? Or how should one look at it from that angle? This was the first question.

S

Sanjay Agarwal

executive

Yes. should I reply now? Or do you want to ask a second one?

R

Rohan Mandora

analyst

So maybe you can apply that and then I'll take the second one.

S

Sanjay Agarwal

executive

Yes. Okay. I mean billion question. So you're absolutely right that we had a long-standing position that we don't want to do macro finance as a subject. But we also have gone to our own evolution mindset in terms of what we should do or what we should not do on a bank trade phone. And Maxi Finance also has gone through all those up and downs in the last maybe 15 years. But I think if you see now we hold regulation framework, the focus, the kind of support the entire ecosystem is giving to this segment is tremendous, right? And we, as a bank, also have to have some objective around private sector norms, the inclusion norms, the inclusion impact.

So I think macro finance is one for debt, which can fulfill all these things. So I think we changed our mindset that we have to look -- relook this strategy of not looking towards macro finance business at all. And the last maybe 2 quarters, I commented that we really want to build more organically. And we started on that path but once I met Rajiv and the team in maybe 2, 2 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, '10 challenge, maybe around 2016, '17 and then, of course, again in 2020 post-COVID, but they have always become more stronger, and they emerge better from every crisis side.

So you need to have the best team to handle this kind of business side. And that remains our core in our goal we chose, right? It's people who matters, right? And that is why if you see our gene, whether it's being and our credit card guy or a commercial bank guy or maybe retail assets. We have done phenomenally well because we back people, right? So we are in bank let's back people who have done so much hard work who has a fighting split. You understand this business in and out.

And they have shown their entrepreneur mindset to come up on from all those challenges. So I think for the business segment itself. And then the team, which we are getting is tremendous side. I think these are 2 things, which, in my opinion, made us more in favor to merge the entity with us. And of course, in complementary nature that they are more south, they have 49% touch point in south, which we don't go naturally. We need to understand people side. We need to understand overall psyche of people who want to join us.

So it gives us in an easy way or maybe important role to understand those markets in motion. And it's very important to understand our case and people who are emotional because that's the way we offer in India. So that's one second thing.

And third, I think there are banks, right? So they are well done. There's a lot of transparency. There is a strong word, strong private equity players who are with them for last maybe now in 20 years. So they have shown that they can be with the company for maybe -- it's a long time to be for the private equity player to be in the country right.

So I think these are 3, 4 things which really impressed us a lot. And we could turn around, right, because there was a lot of purpose on the both of the sides that they really want to make this deal happen. And of course, I strongly believe that it is -- the price is also very right. It is generous from the one, the other side that they accepted our offer. But I strongly believe that price is also very good. And of course, then the size is not too big, not too small.

So I think we have 5 things, which -- and which we believe that is unfavored to do this business. So very happy. Very happy. I know there would be some questions around new people, but we will answer it as we move forward, right? So that's one. And any other question?

R

Rohan Mandora

analyst

Sir, on the contiguous expansion piece?

S

Sanjay Agarwal

executive

Yes. So that is there. So I don't think that we are changing our trends. Rather, we have around 130-odd liability brands like AU in Finke, which will add on to our overall growth strategy. And we rather want to have more rational growth strategy at AU distribution now because if you're getting around 1,300 touch points, how we can leverage it, how we can make it more effective, right? How we can have the well-rounded distribution built around those centers?

So I don't think that -- so that's why I'm saying again and again that there are more knowns than unknowns. And we have gone through very thoroughly in terms of overall understanding and then want to build very patiently. So I think the bandwidth issue or the cost issue or the things, which we may not control, I don't think, as of now, we are able to understand that. But -- and I'm sure that there will be none. So -- but small here and there, we should manage it. And we should learn also to manage it.

R

Rohan Mandora

analyst

Sure. Sir, the reason I was asking the question is that like if you look SMB, they have slippages that are up around 7%, 18% and 7% in '21, '23. Wars, if you look at AU, historically, you've had category-leading performances. So nothing stands out. It's what I got as the initial field in Finka microfinance business. So that's where I was asking this question.

And second thing, sir, in the presentation, we have made a comment that the management continues to focus on seamlessly executing our stated in '27. So does that mean that we are comfortable operating as an SMB for '27? How should we read that statement?

S

Sanjay Agarwal

executive

Rohan, one at a time. So again, I can only say this because it's difficult to comment everything so upfront. We'll cross maybe now 1.25 lakhs a role of balance sheet by next March. So the size and the scale and the width will allow us to take a better informed decisions. So -- but what I'm saying is this that Techno just now 6.5 years of us, we've been in SMB, we had 1 agenda. We have fulfilled that there are nothing as such where we should be worried about.

Our asset quality is amazingly well in shape, our digital franchise is now building up very well. Of course, deposit franchise is not there. Things comes very easily, but we have well rounded it through the other product range, be it wealth, street, insurance, be it payments, be it credit cards. So I think we are working on that path where this franchise will become a formidable force in coming years.

P

Prince Tiwari

executive

Yes. And just on your point, Rohan, around the slippages. Of course, we all know that the entire MFI industry has gone through a cycle, right? And the pandemic was relatively much harsher on them as compared to a secured lending business. And that's what we have also factored in when Sanjay talked about in his opening speech that through the cycle, if you look at the MFI business, with adequate provisioning, you can generate a high-teen ROE.

So honestly, while 1 or 2 years, there are -- it is prone to even risk. But the trick that we figured out in the last 10 years, given that it has become much more regulated, the players are much more accepted. The overall practices have evolved over a period of time is to make a very consistent provision even in good times because that will take care of you when the event risk strikes.

Operator

The next question is from the line of Nitin Aggarwal from Motilal Oswal.

N

Nitin Aggarwal

analyst

Congrats on the merger. A few questions I have. Like first is on the securitization. We have been going for higher securitization this quarter, we did around INR 2,900 crores. So what is your strategy on the same going forward?

And the second one is on the stronger growth that you have reported in commercial assets, along with our 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 strategy that you're adopting on the securitization front?

S

Sanjay Agarwal

executive

Thanks, Nitin. But I think I will ask Prince to reply on this.

P

Prince Tiwari

executive

Yes. Listen, 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 teams, especially in an environment where the interest rate is high and we don't want to load up ourselves on the bulk deposits. So securitization, obviously puts a way to generate liquidity.

Second, it obviously frees up capital, I think, but that's not the main reason. I think the last point or the second part of the question is very app, where you said that the overall PSL -- so our strategy this year is more to sell non-PSL as compared to priority sector assets. And again, so far, whatever we have securitized bulk of it has been on the nonpriority sector lending book that we have.

So that also helps me achieve a higher percentage of PSL achievement against the regulatory compliance requirements. The purpose is dual. One is liquidity, but at the same time also ensure that my PSL compliance goes up.

S

Sanjay Agarwal

executive

You want to add on, Vivek?

V

Vivek Tripathi

executive

Yes. So on the -- the second question on the commercial banking assets. most of the business banking and retanking to extend that 90% of our 19 and almost 35% of our business like the assets are the only book which is an agent lending NBFC lending, that's the go. And within the real estate, almost 40% of our branches are actually PSL because we led 2 projects, which are classified in the accordable house.

S

Sanjay Agarwal

executive

Is that question answered? Did that answer your question?

N

Nitin Aggarwal

analyst

Yes, that answers. And then how do you see the overall loan growth on balance sheet advances growth with the securitization approach?

P

Prince Tiwari

executive

So on -- I think we have already guided, Nitin, that for the full year basis, we are looking to see anywhere around 25% to 26%, right? I mean our overall stated ranges stand is that liabilities will drive our asset growth. And we -- when we speak with our liabilities team and given whatever we have been able to do in the first half of the year, of course, Q1, we chose not to grow our deposits because of the liquidity. But I think on the liability side, we can see that we can grow anywhere between 25% to 30% on an annual basis with the constraints around the cost of funds that we want and the kind of deposit mix that we want. So that basically will ensure that we should do our asset business anywhere around 25%, 26%.

N

Nitin Aggarwal

analyst

Okay. So that basically is not changing because if I look at the first half, we have grown around 10%. So we are looking at a 15% growth in the second quarter -- second half now. Broadly around that.

S

Sanjay Agarwal

executive

Around 11%, yes.

N

Nitin Aggarwal

analyst

Yes. Yes. Right. Yes. Right. And so 1 more question we will securitize. Got that. And 1 more question that I have is on the universal banking license plan. And so now after this merger, what are our thoughts on that? Will that get deferred? And any comments around that?

S

Sanjay Agarwal

executive

Then, again, I repeat one at a time. So the idea is to very honest, I have to really build a bank with the all-round capabilities side. So I think universal is one word, which is just comes in every discussion. But if you see AU maybe in April '24, you will see with around 30 product lines. And with the cross-selling ability of wealth, insurance, AUM license. That means FX, the payments, entire credit card, PI growth. So I think I would sincerely believe that we should be viewed by the people as such now that we have that all around capabilities in terms of product, in terms of customers because once we start macro finance, it will add on to a customer range, which haven't served at all by us in the last maybe 28 years, right?

So I think the kind of width, the kind of, I would say, depth, we are building us building our franchise. It's very good in my opinion. And then of course, once we settle down, we will look for the next thing. But I would only say that as of now, one at a time.

Operator

The next question is from the line of Anand Dama from Emkay Global.

A

Anand Dama

analyst

What is the reason for the INR 700 crores fund increase by, is it more to do with that? Basically, you want some cleaner back before the move happen?

S

Sanjay Agarwal

executive

No, Anand. I think everybody knows that Inge was about to launch their own IPO, and they were supposed to risk capital, and they are high leverage in that sense. So -- and merger will take some more time, right? It is not happening to be tomorrow, right? So -- and they need a capital for their own business as usual, right? So their own team has -- or their own investor has committed to the team that they will put this money, and we accepted that, right? So is that simply.

P

Prince Tiwari

executive

Yes. And Anand, on the G&P side, again, on the cleaner pack, the book is already fairly clean. As on 30th September, basically audited financials, the gross NPAs are in the range of 1.6%. And if you see over the last 3 years or at least last 2 years, definitely, they have written off a lot of COVID-related NPLs. And in fact, basis whatever interactions we have had and the due diligence feedback that we have got, they have been recovering almost quite a decent chunk out of that written off portfolio. And the expectation is that we might be able to recover more than 10% in the current financial year.

A

Anand Dama

analyst

But basically, the SBS limited kind of answers also basically had its own issues when it was March. So just wondering basically if this is in the pile.

So secondly, what will happen about on the whole structure, whether it be holdco or will exist for SMB? And secondly, what is your view that RBI would take particularly using that we are acquiring a very healthy pro.

S

Sanjay Agarwal

executive

What's the execution of the RBI view, sorry?

A

Anand Dama

analyst

We view on acquiring a healthy?

S

Sanjay Agarwal

executive

Healthy SFB. Okay. No, no. So thank you for this complement. So the best or the whole purpose because we strongly believe that this is a very healthy, very well established, well governed, SMB, and we would go to a regulator to really allow us to do this. And so -- but we strongly believe that the kind of complementary position we have to each other. The regulator would be, I would say, would see -- would only support this. But it is their own decision, but we will put our vessel power to convince them. So that's one thing.

Second?

P

Prince Tiwari

executive

On the point that you made around past merger between Dish and future. I'm guessing that's the question.

S

Sanjay Agarwal

executive

Now yes, food. So no, I think the holdco structure, I think that is their own -- they seem to be made once we get to that level. But initial understanding is that the holdco investor will get the shares of AU by liquidation. But I think they will take their own decisions. So it's early to comment as of now.

A

Anand Dama

analyst

So I was just wondering about Padiawould take any objection to the merger because there is an acquisition of a healthy given sense for these entities to operate separately.

S

Sanjay Agarwal

executive

No, there is no acquisition. It's a merger.

A

Anand Dama

analyst

Sure. Sir, any concerns that you see in terms of integration that would come by and any integration-related costs that you see?

S

Sanjay Agarwal

executive

Not much, Anand, because as I already commented that it is -- there are more South-based bank. We are more North and West-based bank like 10,000 people work in MFI business, which we don't have. So that they will continue to work with them. The complementary function, which may be have the similar kind of job profile would be not more than 100. We need to sit together to understand those things and how we can align them also with the overall strategy of the bank.

In terms of tech integration, as you know, the bank is not that big, right? The deposit base is around close to INR 10,000 crores. And we are working more on Oracle and all those things. So it is more of a now API net integration. So that should also help us better transitioning there.

So in that sense -- and they are well governed in terms of the overall inspections, overall umbrella of regulators. So that is there. So I think that's why I'm saying there are more knowns than unknowns. Then of course, M&A will throw us some kind of challenges as we move forward. But as a team, we need to have that kind of mindset that we can understand those challenges, we'll sit together and try to resolve it because the common interest is now one. The common interest to really build one of the finest retail franchise for this country.

Operator

The next question is from the line of Umang Shah from Kotak Mutual Fund.

U

Umang Shah

analyst

Congratulations to the team, this strategic merger. Sir, a couple of questions. One is on the shareholding of Femcare Small Finance Bank. Now 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 -- and as per the DRHP there, 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 care SFB or the holdco? Or how does that work?

P

Prince Tiwari

executive

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 Sanjay said in the earlier question, the holdco doesn't -- it's a nonoperator 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 dissolution or a liquidation process, which will take -- I mean, who knows how much, but the NCLT process is expected to take a longer time.

So we don't really expect a lot of liquidity.

S

Sanjay Agarwal

executive

And of course, I don't think that there is one of investors has seen a large chunk. It's well distributed, right? And this all put together, they would be taking around 10%, right? And if they have maybe around 20 investors, so the average out only would be more than 1% each, right? So other than 1 or 2, right? So -- yes?

P

Prince Tiwari

executive

And also, we have some investors there who are common and they would like to probably hold on because they already hold AU. So we don't really see a lot of liquidity starting the market over the next, at least 15 to 18 months.

U

Umang Shah

analyst

Understood. And sorry, just 1 clarification. The share swap will work in the same fashion for both the promoter NTT shareholders as well as some of the public shareholders, right?

P

Prince Tiwari

executive

Sales shop is for all the shareholders, including the holders it will work at the same ratio.

U

Umang Shah

analyst

Understood. Sir, the second question is, again, in part, Sanjay has already kind of answered it, but typically, the way we have seen in mergers, now we do understand synergies will take some time to kind of show up. But are there any one-off costs, which we are foreseeing at this point of time, which can hit us maybe next 6 to 12 months?

P

Prince Tiwari

executive

Yes. So by one-off, do you mean sort of integration costs? Or I mean, is this a related or some other business-related aspects?

U

Umang Shah

analyst

I mean, deal related. And again, to the point on asset quality, which, for instance, Sanjay answered earlier, but I mean, if you look at the headline NPAs and credit costs of in are relatively higher compared to AU. So maybe basis your due diligence, any one-off expenses or stuff like that?

P

Prince Tiwari

executive

So as I said, among the Finka, again, during the last 2 years, they have provided a lot and written off a lot of book. In fact, they are seeing recovery from that book. So to that extent, they in fact also did an ARC transaction last year to -- sorry, last quarter to sell some of the legacy NPLs in their asset -- secured asset book.

The microfinance book is already pretty clean. They have a net NPA of about 0.6%. So to that extent, we don't really think there will be a lot of provision requirement. Their policy on provisioning and write-off on unsecured book continues to be as stringent as ours. They write off their unsecured book at 180 days or provide 100% as 180 days. So we don't really see any major material provisioning coming to our book just because of the change in the mix.

As far as the integration and other costs are concerned, of course, as Sanjay already alluded, there will be some amount of transaction-related expenses around stamp duty and other things. But that's normal in nature. We don't really see a lot of integration cost because the businesses, as you said, are very complementary.

The MFI business can continue to run as an MFI business because we don't really have it. Some of the other businesses are very complementary around the affordable housing finance and around the entire small business loans. So to that extent, we are not really envisaging a large integration cost. Whatever minimal that might come in because of system and other things has already been baked into our ROE profile as Sanjay already said.

U

Umang Shah

analyst

Okay. Perfect. And just one last data point. The 9.9% post-swap equity, which the existing shareholders of Final get. Does this include the INR 700 crore capital infusion by promoters or that would be over and above this?

P

Prince Tiwari

executive

No, absolutely included in that.

U

Umang Shah

analyst

Okay. So this is a fully diluted one?

P

Prince Tiwari

executive

Absolutely. Including the tools.

Operator

The next question is from the line of Santanu Chakrabarti from BNP Paribas.

S

Santanu Chakrabarti

analyst

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 EU, even in ignition as NBFC was that reason why it was present in high 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 bank, and there and thereabouts, something that very few other companies are balanced.

And we know the stories around how Sanjay himself was so focused on that the credit culture of the company should remain pristine. So in that context, bringing in an MFI book where as you guys are yourself admitting that every 3, 5 years, there seems to be occasional meltdown, that is the nature of the business, while it's profitable is a good time. It is also susceptible to large drops in sporadic. How does that fit into your credit culture of where every BP must come back that goes out? That's my first question. And how do you maintain that entity across the organization with this new kind of business coming in?

And the second question relates to your segments of Wheels and MFI. Now we have been talking about this. What I want to understand is that each current cyclical concerns around a lot of new entrants, et cetera, are holding you back a little bit in terms of higher growth in high-yield segment. When do you expect that to turn? How much of this is a cyclical concern versus a structural concern? Because if I look at the opportunity headroom that we still have, even in existing geographies, including Rajita, I mean that seems to be high. So at what point do you see that turning? And your thoughts about this, does this change basis, what is in coming?

And a follow-on to that question, how does the book composition, the loan book composition is changing a little bit, there's microfinance coming in, et cetera. What -- are you revising your own thoughts regarding what you consider as leverage resold for the overall balance sheet? Because that is so critical to your dilution time line. You have been doing in excess of ROE and therefore, there's been an opportunity to make your compounding larger. Investors have benefited from it. Do these thresholds change to the dilution times? This is the evolving new risk parameters within the broader loan portfolio. These are my questions.

S

Sanjay Agarwal

executive

Thank you, Santanu. Thank you for the kind words. So I will answer the first one because that's very important that we always discuss that why you should not be in a macro finance business or onset profile. But again, I will say that the world has changed dramatically over the years. Before economic cycle has changed dramatically over the years. Whole loan profile, the segment also has changed in India, too. We have got not 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 franchise complete.

Once if a customer is there and if we don't offer them credit card, so don't offer them personal loan. They don't feel that you're complete as a banking franchise, right? So I think sometimes it is driven by the customer needs, the customers' overall expectation from a banking franchise. And you also have to believe that the team has done tremendously well over the years to understand the risk and understand the execution capability around -- even at around the difficult product like Wheels and MSME. Those products are not easy, right. But over the years, we have built the overall, I would say, the process, the policies, the overall culture that how we should learn and how we should collect.

And that is why I'm saying you, again, again that once I met Rajiv and his team and saw their tremendous capability to work under pressure, work under uncertainties coming out through those time when nobody was supporting micro finance and to remain there, right?

So I found that they also come with a similar kind of mindset, which we have also performed over the years. And macro finance, of course, is not that secured product. But nowadays, by the overall credit culture coming in the country, I think that those segment is also now addressing to the need of the art, there's no habitual defaulters. There are no overleveraging. There's lot much compliance has come in, there's lot much clarity on the ground and all those things, right?

So I strongly believe that by virtue of these changes, and by virtue of bringing teams with so much of confidence, so much of vintage, so much experience. And again, the overall attitude of AU has a team that we won't lose our money. People need to support us for some time that we at AU might change this whole perception also that macro finance is a risky business, right?

And of course, it has its own risk around credit loss, and that is why we are saying that we will provide education. We don't almost say that this year, the market is good, then we just don't provide anything, right? So I think as we move forward, we will sit together and want to understand the whole cyclic challenges. And of course, we want to provide educating. And I just want to reassure you that -- so I don't think that it will create an unnecessary challenge on overall bank's continuity or bank's overall approach towards business. It will be just around 10% of our overall book.

It helps us to add on one more customer base. It has to get the patient requirement because you know that we aspire always to have a very sustainable business model. So I think this will add on to all those things. And I think the overall character of AU in the sense that we should have very predictive asset quality -- we'll continue. We'll continue. I can assure you that. Of course, I know that this has its own challenges and different challenges, but I believe that because of our experience, because of the way we have taken, because the way we execute ourselves on the ground should help us to maintain similar kind of business as we move forward, right?

And so overall, I would say that business will evolve because that's the way we should be because if you go back in when I started, it was only real business and when you would all the we started SBL, which was not heard in the industry, then we started affordable housing, again -- so every time we have done something new and has proven that has proved that we can very well understand the whole business from the ground up and can execute very well, right? So I hope that this time also, the story won't be different and we'll go the same path.

So you want to add on? Santanu, I hope your second question. So when that go.

S

Santanu Chakrabarti

analyst

The second question related to whether the core SBL MSME and wheels business, a little bit of slowdown, how much of that is cyclical and structural? And also I asked that given that the asset mix on a blended basis is changing a little bit because of the acquisition. How does that impact what kind of leverage thresholds you are comfortable with? Does that change? And therefore, how does it impact your dilution timeline?

P

Prince Tiwari

executive

Doing so value.

S

Sanjay Agarwal

executive

No, no, no. I don't think, Shantanu -- so I will allow -- I will ask Balaji to comment on our SBM and other business. But I'm not able to understand this dilution piece. We will have the market.

U

Unknown Executive

Typically, San capital, right. in we will be getting around close to 2,400 network -- so it will allow us to leverage maybe another 1 more year on this money. So -- but it's very -- again, our stated requirement that we don't want to go below 18% kind of capital efficacy. We don't want to grow more than -- we don't want to leverage -- so I think it all -- the max will be around this, we'll go and raise more capital, right?

S

Santanu Chakrabarti

analyst

So that we are asking is any of that changing because of the nothing.

U

Unknown Executive

Nothing, Yes. Minis Baskar. Just to answer on both wheels as well as the ABL business, both continue to be on track. It is just a matter of getting our rate adjusted to the cost of man. And that is the only 1 reason because we also do now is build the festive season we have to come -- be a part in the marketplace, we get competitive. And hence, we have been building our rail buffer on most of the businesses. Otherwise, by design, by structure, by people on the street. We continue to remain -- the entire team continues to remain there on the trend we are doing whatever is in our plan for the year. So truly nothing to -- no mister no is there. It's all we had to plan.

S

Santanu Chakrabarti

analyst

So Base, basically, what I'm asking is, see, this year, these businesses, These core businesses have been doing very well for you. And obviously, as you have also highlighted and explained for us to see. There's a lot of headroom there in terms of opportunity for you to sustain long-term high growth. I understand that because of increased competition, we have had to hold back a little bit as a lot of NBFCs, small finance banks have entered, right, and probably not with as much experience as you. What I'm trying to understand is at what point do you see that cycle turning? What are the evolving realities of that competitive, please?

V

Vivek Tripathi

executive

So Shar, yes, come here. I want to add here that it's not that we are only asked because of competition because of competitiveness. It's a function of rate. As Wascosa said that our cost of fund a little bit aviated because of our deposit franchise, as we all know, in the market. So it's a function of rate for us. And we are already funding on 15% on a mix of used and new tractors and two-wheelers. My SBL business is around 4.5%. My housing is around 11.5%. So as you already said, that there's enough headroom even in Astan and all the geographies we operate. But we are just holding ourselves because of -- it's a function of grade.

Because enough potential in our present operating geographies but because of rate only our earnings is, otherwise, we can have any number of growth and any number of opportunities capturing in these markets. As the cycle rate gets evolved, that slowed down, deposit franchises there, we are there to catch on all those opportunities.

So it's not because of competition on that. It's our own decision or conscious approach occular size growth, yes.

S

Sanjay Agarwal

executive

Santanu, I hope that answers your question?

S

Santanu Chakrabarti

analyst

Yes.

Operator

The next question is from the line of Param Subramanian from Nomura.

P

Parameswaran Subramanian

analyst

Most of my questions relating to the merger have largely been answered. So -- just a couple of questions. Firstly, on the securitization, which you have done 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 looking at it from the perspective that you -- despite having a strong 9% quarter-on-quarter deposit growth, you had to do such a large securitization. That's the first question.

I'll come back for the second.

S

Sanjay Agarwal

executive

Yes. So we actually plan ourselves for a 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 guide. 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 transition in the month of September, like what is commented, it was non-PSL, non-PSL a better rate, maybe offered you in September only, right?

So I think based on those businesses requirements, which we take decisions. Sometimes it doesn't look nice on the balance sheet as such. But like you're saying that we grow our deposits so well so while you need to securitize it. But we can presume that next 6 months, there will be more intense competition around deposits side and the cost may go up.

So we need to be more smart enough that what is good as of now when we need to take that kind of decision. Sometimes it goes well, sometimes it goes wrong, but that's the way the life is. So I think that's the one thing, which did appreciate that whatever we have done over the years, this has helped aid to become more formidable, more stronger and more sustainable, more reliable, right. So that's one thing, right, which I want to say that it's a very small die-making, which we take every day to remain relevant and to remain sustainable, right. Do you want to add on?

P

Prince Tiwari

executive

No, just on the LCR point, again, Param, as we had articulated earlier, last quarter, we had abundant liquidity, and it was a very conscious strategy to consume whatever excess liquidity buffers that we had. So yes.

U

Unknown Executive

Just terms of what Prince mentioned, because in the first quarter, we had excess liquidity, and we decided that we will not grow our deposit much. But this quarter, we are on average 125% LTR. So it was a mix of our decision that we will go for some securitization. This quarter, we didn't have any PSLC. So it was a mix of some deposits and securitization.

P

Parameswaran Subramanian

analyst

Yes, I get that just on this again. So your loan book as well around 2% quarter-on-quarter, right? But your deposits have grown 9% quarter-on-quarter. So does that imply -- because if the average LCR has come down, does that imply that most of the deposits were back-ended because I still don't get how the LCR could have dropped for the?

P

Prince Tiwari

executive

So again, Param, as a couple of things, okay? The first is the entire securitization is typically back-ended, right? So most of the liquidity impact you'll start seeing in the next quarter, right? Because you end up doing securitizing generally as a quarter in transaction. That's the way the market works.

As far as the entire NCR is concerned, it's -- I mean, if we had a higher deposits, we'll also appreciate that we didn't have any deposit growth in Q1. So to that extent, the Q1 -- the Quarter 2 -- sorry, Quarter 2 deposit growth at 9%, it cannot be back ended. And we have also given the monthly average numbers as well. So we'll not find a lot of variation between the month and numbers for the quarter end numbers and the average numbers for that particular month. It is given on the slide on the liabilities.

P

Parameswaran Subramanian

analyst

Got it. Got it. Fair enough. My second question was on the credit cost. I think in your opening comments, you had mentioned something about the credit cost, some amount of the credit cost being led by the unsecured segments. So now that we are at this, say, credit cost level of, say, 80 basis points, maybe ex of the contingent provisions, we reversed 90 basis points of credit cost this quarter. So sustainably, how do we see this number evolving going ahead? That's it from me.

P

Prince Tiwari

executive

I don't think it is 90 basis points. Again, there is a base effect, as I said. But having said that, it is about 60 basis points -- 50 basis points for this particular quarter. And on the mean reversion basis, we are saying that it could go anywhere around 60 basis on a more sustainable number. Yes, rather than 20 or 30 basis points that we have been seeing in the last year.

The credit card accounted for INR 30 crores of write-offs this particular quarter.

P

Parameswaran Subramanian

analyst

Okay. Okay. And are we comfortable on that book right now? In the INR 30 crores write-off or...

P

Prince Tiwari

executive

Yes, very comfortable. I think we -- I mean, we understand that it's a business which has some amount of inherent risk. And to that extent, our provisioning policies and right of policies take care of that. Sanjay, do you want to add anything on that?

U

Unknown Executive

So on the credit card book, we are quite comfortable on this piece because we normally provide -- we do right off at 180 DPD. So that's the reason and the book is growing, it's a 2.5 years old book. So we are getting the seasoning now. Maybe another 6 months, we'll be as good as any other industry player. Competition numbers will be there at the NPA numbers. Our book will get seasoned in the next 6 months.

S

Sanjay Agarwal

executive

Yes. But I just want to add on there, Sanjay, beside that we run P&L for every product side. So Wheels will have its own the name and, of course, the own credit cost and vis-a-vis ocean we will have its own as we move forward, macro financial has its own. Credit card will have their own. But I think overall, we always believe that any asset, which gives us not a 2% ROE, we really want to concentrate and want to build from there, right?

So I think you will find that maybe on a credit card, our NPAs around maybe 3%, right, or 4% in a macrofinance also. But overall, I strongly believe that every business next by March '27, we'll start giving you another 2% kind of ROA. So that's our basic principle just want to put on the target. They might have their own names, they might have to on credit cost, but that's the overall principle, right? Yes.

P

Parameswaran Subramanian

analyst

I just wanted to understand this INR 30 crores, is this something that is recurring that you see will be recurring going ahead write-off? Because if I look at that number on an annualized basis on the credit card book.

S

Sanjay Agarwal

executive

Credit card INR 30 crores write-off?

P

Prince Tiwari

executive

Yes, yes. So if you see in last, we have been growing by INR 500 crores book every quarter now, in the next 2 quarters, you will see that INR 40 crores we have already grown in the past 6 months. So it will be INR 30 crores will be sought of, which will get -- it will be in line with this only.

S

Sanjay Agarwal

executive

Operator, sorry, we are -- I hope we have answered your question. Param?

P

Parameswaran Subramanian

analyst

Yes, yes.

S

Sanjay Agarwal

executive

It's INR 24 crores or INR 30 crores. INR 4 crores. back, Param, it's INR 24 crores. About INR 30 crores Overall, it's no Yes. Okay.

Operator, in the interest of time, can we take one last question?

Operator

Sure. Ladies and gentlemen, due to time constraint, this will be the last question for today, which is from the line of Manish Shukla from Axis Capital.

M

Manish Shukla

analyst

So firstly, Rajiv and his team, which will join after the merger, is there a tenor lock-in for the team to stay with the bank?

S

Sanjay Agarwal

executive

No, nothing like that because it's more this is fast more basis that we want to work with each other, right? So I think that bonding is far, far better than any kind of documentation bonding because those are very highly experienced team. And Rajiv is working as MDCO of a bank. So we expect that it 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. So -- but overall, yes, because we have appointed Aon Hewitt to advise us the -- or a better integration because people will have their own choices. People will have their own mindset.

But the challenge has to really how quickly we can align them. But I strongly believe the way we have built assets over the years where people really had mattered us more, and we will continue to do that. And so no forceful kind of agreements, but very high on feeling kind of agreements.

M

Manish Shukla

analyst

Sure. The 700 promoters would infuse will it happen at the same valuation that AU is paying?

S

Sanjay Agarwal

executive

Yes, same, same. Everything will even same, right?

P

Prince Tiwari

executive

Yes. Yes.

M

Manish Shukla

analyst

No, I'm saying the INR 700 crores, which they'll pump into the bank before the merger, that will happen at the same valuation for Pincare as you are paying further back.

P

Prince Tiwari

executive

Absolutely, absolutely.

M

Manish Shukla

analyst

Okay. In terms of profits of incur, first half is INR 220 crores. Last year, full year, it was INR 100 crores. So are there any one-off in first half this year?

P

Prince Tiwari

executive

No, no. I think last year was more -- they will still continue to write off or clean up the book, which was post-COVID, and this year, the normalized operations have come in. So you can actually take the run rate of the first half year. as a more normalized run rate as compared to what happened in the last year.

M

Manish Shukla

analyst

So what would be the proportion of recoveries in this INR 120 crores?

P

Prince Tiwari

executive

Crores is -- sorry, on when you go out INR 220 crores first half profit, right, INR 29 crores. PAT Okay. Yes. What is the recovery number in that? They are recovering about INR 10 crores every quarter, monthly.

S

Sanjay Agarwal

executive

INR 10 crores monthly.

M

Manish Shukla

analyst

INR 10 crores monthly, okay.

S

Sanjay Agarwal

executive

About INR 60 crores of this could be.

M

Manish Shukla

analyst

So before tax?

S

Sanjay Agarwal

executive

Right, INR 60 crores before tax.

Operator

Ladies and gentlemen, as that was the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you.

P

Prince Tiwari

executive

Yes. Thank you, Michelle, and thank you, everyone, for participating. We really look forward to this merger. We have really 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 we -- if you have any questions, you can always reach out to the Investor Relations team. Thank you.

Operator

Thank you, members of the management. Ladies and gentlemen, on behalf of AU Small Finance Bank, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.

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AU Small Finance Bank Ltd
NSE:AUBANK

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AU Small Finance Bank Ltd

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AU Small Finance Bank Ltd NSE:AUBANK

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AU Small Finance Bank Ltd
NSE:AUBANK

Q2-2024 Analysis
AU Small Finance Bank Ltd

Earnings Call Transcript
2024-Q2