AU Small Finance Bank Ltd
NSE:AUBANK
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AU Small Finance Bank Ltd
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Ladies and gentlemen, good day, and welcome to the AU Small Finance Bank Q3 FY '23 Earnings Conference Call. [Operator Instructions]I now hand the conference over to Mr. Aseem Pant from IR team.
Thank you, Inba. Good day to everyone, and welcome to AU Bank's Earnings Call for the Third Quarter of FY '23. We thank you all for joining the call and we hope you are well.As usual, for approximately the first 20 to 25 minutes of the call, we will have brief remarks by few members of our senior management team, 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 overall performance and outlook for the bank. He will then be followed by our ED, Mr. Uttam Tibrewal, who will share his thoughts on the operating highlights for the quarter. Besides them, we also have few other members of our senior management to answer any other questions you might have.For the benefit of everyone, we would humbly request that the number of questions per participant be restricted to a maximum of two and to join back in the queue or email us in case you have any further questions.With that, I will request our MD and CEO, Mr. Sanjay Agarwal to share his thoughts.
Thank you, Aseem. Good evening, everyone. Namashkar. Thank you for joining in. Hope you are doing well and had a fantastic start to 2023. The quarter gone by was the 23rd quarter in our banking journey and another quarter where we have demonstrated consistent performance and the team has delivered a strong set of numbers on all the fronts. We are on the course of namely a robust foundation for building a sustainable and a scalable bank.In terms of micro, you all know that 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 continues to face intensified pressures due to the global inflationary trends, weakening global demand and high volatility in portfolio flows.Specifically, the tighter liquidity and a strong credit growth has led to the increased demand for deposits and rise in deposit rates all across in the last quarter. Despite these headwinds, India emerges as a bright spot with GDP expected to grow north of 6.8% this fiscal as per the latest RBI forecast. The effects of series of rate hikes by RBI will help in bringing down inflation, while maintaining the growth inflation dynamics in balance and key bond yields in check.Moreover, India's favorable demographic, stable democratic set-up and increasing impact of technological innovations like India Stack, coupled with these structural reforms implemented in the last five years, are helping us emerge as a knowledge and technology leader in the world. The governance structure and compliance culture in the country is also going through a positive change and it will all be equalizers for growth.Coming to AU, the last quarter was among the most consistent and a stable quarter for us. I'm happy to share that we not only delivered the ever-highest net profit of INR393 crores, but also performed well across all parameters. In line with our expansion strategy, we opened 42 new touch points, crossing the milestone of 1,000 touch points with a presence in 21 and 3 UTs of India. We've entered into 2 new states, Andhra Pradesh and Kerala in last quarter. Our deposits grew by 38% on yearly basis and 5% on quarterly basis, led by an increase in retail term deposits. Our overall CASA plus retail term deposits is around 70%.As the system credit growth continues to be strong, the competition for deposit has [ intensified ] the rise in deposit rates for all commercial banks in quarter 3. We also raised our term deposit rates and our saving deposit rates in certain buckets. The overall reception was quite strong in the retail segment with a clear preference for term deposits, thereby locking long-term interest rates on deposits.In the last quarter, our overall CASA moderated to 38% from 42%, but I strongly believe that it's still in the zone. Our cost of funds saw a 14 bps increase for the quarter as compared to last quarter. As a systematic liquidity continues to be tight, interest rates remains a key variable and our ability to optimize cost of funds remain a key priority. At the same time, our yearly cost of money continues to be in line with our earlier forecast at around 5.84%.We remain on course to deliver our margins for our current financial year in the line with FY '22. Moreover, I strongly believe that cautious stance adopted by us around growth of neither aggressively building assets nor raising more money at higher rates over the last six months have served us well, and any impact of elevated cost of our margin of next year remains a key monitorable.The credit market remained strong with strong demand coming across all our asset SBUs, be it Wheels, SBL, Housing and Commercial Banking. The asset business saw a disbursement of north of INR10,000 crores, growing 23% year-on year with the disbursement yields remaining stable. Our non-fund business also saw sanctions of around INR500 crores. Our asset quality, which is one of our core strength, has remained resilient across cycles and we are committed to maintaining pristine asset quality.Moreover, we are seeing an increased awareness around customers to repay their dues on time. And there is also a strong momentum in the business, resulting in improved collection across buckets and products. Our collection efficiency for the quarter was around 107%, resulting in a gross NPA of 1.8% and net NPA at around 0.51%. In fact, asset quality post-pandemic book is even better. 81% of our book was originated post-pandemic where GNPA is around 0.6%. The restructured book also seen healthy recovery and now stands around 1.4% of the advances. Our balance sheet has now crossed INR80,000 crores. The bank remains well capitalized with capital adequacy around 22%. ROA and ROE for the quarter was around 2% and 15.2% respectively. I think more will be shared by Uttam.Around customers, we welcomed around 3.3 lakh customers last quarter. And with a view to serve our customers holistically, we also expanded our third-party offering by entering a partnership with HDFC Life and ICICI Lombard for the insurance. We continue to invest and make progress in our technology journey. We went live with our upgraded CBS, a fee-based stack, which has been in the work for last 10 to 12 months and will provide us better scalability and resilience as well as new personalities.Our automation effort also started yielding results with more than 150 processes automated. This will go long way in cutting our cost. We are also progressing well in implementation of our data platform which will go live in phases, starting in Q4 and improve our data analytics capabilities. On the digital side, we continue to scale-up and improve our various initiatives, be it our own app, AU 0101, Video Banking and Credit Cards. We have around 16 lakh digital customers now. And we have around 4 lakh credit card customers and our monthly issuance is around now 45,000 cards per month.For our progress, we are awarded the Best Technology Bank and Best Bank in a Digital Engagement by the IBA. And of course, it was in Small Finance category. Throughout the last year, the leadership team of our 9 SBUs presented their business model and strategy at various AU Insight sessions. I hope you would have a chance to interact with our senior leadership and their department to get a deeper sense around the SBUs, sustainability and profitability.Our senior team as of now is quite stable, well balanced and driving the business with a lot of passion, purpose and pace. We are building the culture of these three themes in our organization. In fact, recently, we also were featured among the Top 50 Companies With Great Managers. And out of that, 3 leaders [Indiscernible] across the industry.I'm also delighted to share with you that AU Bank has been judged as Great Place to Work for 3rd in a row. We continue to introduce progressive HR practices which are best in the industry with an intent to build this bank where our people not only develop their career, but also retire from here. Our recent introduction of Menstrual Leave for women colleagues and AU Forever Pass, entertaining our alumni to join us any time, are probably among the first in the banking industry. Despite from our philosophy of Badlaav Humse Hai, policies like leaves for special occasions, paid sabbatical leave, education assistance, subsidized PL and home loan are some of the key initiatives so far.I'm happy to share that we've also been awarded as a Certificate of Recognition for Excellence in Corporate Governance by National Awards of Company Secretaries Institute in the medium-sized listed corporates. To make our governance more robust, I'm also delighted to welcome Madam Malini on our Board as an Independent Director. She joined in today's board meeting only. We look forward to her guidance in building our bank and take her inputs in the area of our specialization like sustainability and CSR. With Malini madam addition, the total strength of the board has now reached 11 Directors with 9 being independent. But with the heavy heart, I need to also say, [Indiscernible] to our veteran board members, Rathi sir and Jyoti madam who are due for retirement in this quarter by March 31. After a great, long, fruitful and very impactful inning at AU, which we are very deeply grateful, I've got a [Indiscernible] over them and we'll miss them.Last year, we also began our sustainability reporting journey. And I'm very happy to present the first sustainability report of our bank, taking you through our journey of care, of taking banking to all, now being a catalyst in bringing positive changes in life of our communities we work with. The report is global reporting initiative based and its externally assured by PWC. I would request you to please go through it and share your feedback with us.In the end, we are nearing 6 years in our expressive journey of emerging as a best-in-class highly sustainable retail bank of India and each year continues to bring new roads and milestones. We welcome 2023 with great enthusiasm and energy. This year too we'll continue to leverage the India story and further our entire business by 3S; sanitize, scalable and sustainable. The bank is well positioned in terms of balance sheet strength, distribution and digital properties, stable leadership and offers a compelling value proposition for customers on both the deposit and the loan side.As we also move ahead, we will continue to strengthen our governance framework, maintain our underwriting and asset policy, invest in our retail liability for [Indiscernible] our digital outlook, build a strong brand, attract and [ assert ] and provide one of the best-in-class experience to our customers. We are also committed to learn and grow every day.Thank you so much for this patience in listening to me. I hand over to Uttam for the operational highlights for this quarter.
Thank you, Sanjay. Namashkar. Good evening. I'm wishing you a very purposeful and cheerful year 2023. Hope you all are in the best of health. The strength of our foundation and resilience of our business model is getting reaffirm every day. And I'm happy to report that we are executing the same momentum in the current quarter as well with all our businesses delivering a very strong and stable performance across all parameters.To reiterate, we started the fiscal year with a strong performance in Q1, which probably in my experience, was one of the best first quarter in the last 5 years. This was followed by a good Q2 helped by an early onset of the festive season and the festivities continued in current quarter as well. Throughout the first 9 months of FY '23, we have consistently excelled across all aspects of our businesses from deposit growth to CASA growth to improve granularity and stable spreads to strong disbursements and collections. We have maintained a steady course navigating the ever-changing landscape, while preserving our margins and capitalizing on new opportunities, ensuring that our market position remains unchanged.We will continue to push ourselves to reach new heights and stay ahead of the curve. In the last quarter, we reached 1,000 touch points with a branch in Indiranagar, Bengaluru. In total, we opened 42 new touch points in Q3, taking the total to 1,015 touch points, including entering 2 new states, namely Andra and Kerala. With this, we are now starting the Pan-India presence [Indiscernible] with presence across 21 and 3 union territories out of 28 and 8 union territories, covering a total of 709 unique locations.I will now take you through some key operational highlights for this quarter. Starting off with liability performance in this quarter, our total deposits have now reached INR61,101 crores, maintaining the momentum from Q2. We increased our deposit book by 5% despite tighter liquidity in the market. Q3 FY '23 witnessed an increase in deposit rates across all banks, and we have maintained competitiveness increasing our deposit rates too, which resulted higher traction in term deposits against saving deposits. Our CASA ratio for the quarter closed 38% with overall CASA at INR23,471 crores, a year-on-year growth of 35%.One of the key target areas for us has been becoming the primary account for our customers, and we've continued to design, innovate and launch savings and current account products to make this transition matching for our customers. The customers acquired in Q3 for our Royal and Platinum savings accounts constituted 24% of total new saving account customers, excluding BSBD accounts. Similarly, accretion in our higher variant current accounts stood at 47% of total current accounts that we opened in Q3 FY '23, up from 37% in the previous quarter.In October '22, we launched our AU Platinum Business Current Account designed for retail merchants on the back of merchant-specific input solutions such as QR, POS and [ Sandbox ]. We have been able to unload 1,195 Platinum Business Current Accounts till December '22. We are on the verge of launching another premium savings product, which in my mind, will be among the best in the industry. This program is especially designed to provide comprehensive banking and lifestyle experience and will give us a strong foothold and market share in the fast-growing HML segment.With our cross-sell efforts, we disbursed 3,000 plus life and health insurance policies, registered 15,000 new SIPs and opened 6,500 3-in-1 trading accounts during the last quarter. To further increase the bank's third-party insurance offerings, we are partners with HDFC Life Insurance and ICCI Lombard General Insurance this quarter. Asset cross-sell has also been an important focus area for us to deepen the engagement with our customer base. And in Q3, we disbursed INR589 crores to our Branch Banking customers across Wheels, SBL, Home Loans, Business Banking and Agri loans. With all these initiatives, we are steadily improving product mix to increase our average balances.Our product for customers has been consistently rising and presently stands at 1.62 for saving account customers and 1.99 for current account customers, excluding dormant and BSBD accounts. Our digital initiative, AU 0101 app, Internet Banking, Video Banking, Credit Cards, UPI QR and Personal Loans have played an important part in improving customer experience and engagement. Our monthly transacting customers have increased to 57% of our total active star customers with average number of monthly transactions increasing to 33. Further, over 70% of the current account customers are regularly transacting with us with average monthly customer initiative transactions be 75.Through our digital preposition, we added 1.2 lakh new customers, which is nearly 36% of our total new customers onboarded by the bank in the quarter. Today, the aggregate balance is 2.4 lakh Video Banking accounts stands upwards of INR1,000 crores. And we continue to acquire and manage high quality retail saving accounts through Video Banking at almost half the cost of a physical channels. We are also happy with the growing digital adaption of AU 0101 app. We now have nearly 1.6 million customers registered on the AU 0101 app and more than 60% of them were actually logging in December '22.Our credit card preposition continues to scale further with 3.9 lakh live cards and 35,000 monthly card issuance run rate. We have geared up our credit card acquisition through VKYC. In this quarter, we are happy to share that in month of December, we issued 13,000-plus cards via VKYC channel. On the UPI QR front, we have installed 8.7 lakh UPI QRs in Q3 FY '23 and seeing a 33% growth quarter-on-quarter in the value of transactions. I'm also happy to share that this quarter we have disbursed person loans worth INR134 crores, taking total disbursements till date to INR664 crores, all of which has been disbursed fully digitally on the AU 0101 platform.Moving on to our asset businesses, let me start with Wheels. This quarter, vehicle industry sold 51 lakh units, which is 9% growth year-on-year and 3% quarter-on-quarter. In keeping with the industry upward plans, we witnessed the highest ever quarterly volume of INR3,864 crores, 27% higher than same quarter last year with an IRR of 14.38% and an increase of 9 bps sequentially and an average system ticket size of 4.9 lakhs during 3 years. As on 31 December, 2022, the portfolio of Wheels stood at INR21,477 crores to 8.17 lakh live loans, which comprised 52% in new vehicles, 36% used and refinanced, 10% tractors and 2% two-wheelers, while total segment contributed 24%, commercial segment contributed to 36% and tractor contributed 10% to the portfolio. Our average ticket size on the portfolio stood at 3.94 lakh, excluding two-wheelers. The asset quality of our Wheels business continues to improve with gross NPA of 3.32% and collection efficiency continues to remain north of 100%.Moving on to our SBL business. We disbursed a total of INR1,678 crores in Q3 FY '23. In totality, we have disbursed INR4,417 crores in 9 months period at a weighted IRR of 14.4%. This is an increase of 63% over the same period last year. The asset quality of our SBL business continues to improve with gross NPA at 2.68% and collection efficiency continues to remain north of 100%. In Q3, we added 6,000 plus new-to-bank customers, taking the total to 1.81 lakh unique SBL customers. In the same period, our average loan ticket size stood at 11.67 lakh with LTV of 44%.Talking about our home loan business, we financed 4,400 houses in the quarter, disbursing INR547 crores at a weighted IRR of 11%. The total home loan portfolio as on 31 December, 2022, stood at INR3,695 crores across 37,000 loans with an average ticket size of 11 lakhs and GNPA remaining stable at 0.42%. Currently, we are operating in 8 major states with home loans available across 340 branches. Within affordable housing book, much of this book is also eligible for long-term refinance from NHB.Finally, on our commercial banking business, it comprises of 4 major divisions, mainly Business Banking, Agri Banking, NBFC Lending and our Construction Finance business. Together, they have a portfolio of INR11,179 crores at weighted IRR of 11%, focused mainly on providing working capital solutions like CCOD and term loans to MSMEs and small businesses. This book is almost entirely floating rate book and terms of portfolio IRR has benefited from the recent increase in the repo rate.The commercial banking lending business is dominated by Business Banking and Agri Banking, which together accounted for 59% of total disbursement volume of INR2,895 crores during Q3 FY '23. We also have a strong non-fund based business where we sanctioned limits of INR498 crores during the quarter. More specifically, our Business Banking portfolio has been INR4,370 crores as on 31 December, growing on 13% quarter-on-quarter with a disbursement of INR1,033 crores in Q3.Agri Banking business has now touched INR3,447 crores portfolio amount, registering growth of 14% quarter-on-quarter, with the disbursement of INR690 crores in Q3. Our growing footprint in newer geographies, new product initiatives and increased synergies with branch banking have been some of the key factors supporting these businesses. Asset quality for the commercial banking business remained stable with gross NPA at 0.30%.To sum up, post the 3.5 bps increase in repo rate by RBI over the last two quarters and the increased competition for deposits [Indiscernible] by the strong credit uptake, the system-wide depositaries saw significant pressure last quarter. We will continue to monitor and calibrate rates as per the market environment. Our focus remains on garnering granular CASA deposits and our new product offerings like Platinum business accounts and our PremiumStar offering would strengthen our instant CASA acquisition franchise.The business momentum on the ground has been strong and we expect the credit demand to be robust in the current quarter. We remain watchful and agile as we step forward with continued on-ground engagement with customers, while relying on our strength and processes. I remain confident of our business model and execution capabilities and optimistic that we are well positioned that AU will deliver for a robust Q4.You would agree with me that despite the macro economic headwinds and the geopolitical challenges, India has emerged as a bright spot in the global arena. Similarly, within the banking landscape, I believe India is listed to act sweet spot. Having led a strong foundation with a well capitalized balance sheet, sustainable business model and a strong and stable leadership team, we continue to identify white spaces and position ourselves to take advantage of our faculties thereon. I look forward to share more with you in the coming quarters. Till then, stay healthy, stay safe and keep banking with AU. Thank you, and take good care.Aseem, now over to you for Q&A session.
Thank you, Uttamji. Inba, we can now begin the Q&A.
[Operator Instructions] We take our first question from the line of Rohan Mandora from Equirus Securities.
Congrats on good set of numbers. Sir, the first question was, we have consumed contingent provisions during this quarter despite healthy asset quality trend and good profitability. So just wanted to understand thought process of consuming the same and not building the buffers? That's one. Second is, in the last 2 quarters, we are seeing a reduction in employee base. So what's happening there? And third is that, currently, what are the challenges in PSLC business? And also, why are we not [ pursuing ] IBPC route in terms of selling down restructured cases?
This is Prince here. So around the first question around contingencies, like as we have articulated earlier as well, that contingencies are precisely created for a particular purpose. And in this case, as you are aware that it was created for COVID and COVID-related contingencies. Of course, as things are getting normalized, we'll need to resolve those contingencies and we cannot keep on it forever. So if you see, in the first quarter, we did part -- utilized part of it to create floating provisions. And the balance, like whatever is around restructure that's getting used as and when the restructured cases are getting resolved; either it is getting released to the P&L or getting created towards the NPA provisions for the forward flow from the restructured book.As far as contingencies are concerned, very clearly, as I said, we will need to resolve it at some point in time. And we are in discussion with the board and the auditors in terms of their view. And as per their suggestions, whatever is required during the quarter, mind you, we are not taking any provisions through the P&L. What we have been doing is that, if you see, we have increased our provision coverage ratios from what we used to maintain about 50% earlier to about 75% now, including technical write-off. So that's where the utilization is. And whatever is left over at the end of the annual financial year, this is the guidance from the board, we'll take a call in terms of what do we intend to do with the remaining contingencies.
So on PSLC, you know that market is subdued, right, in last quarter also, though we tried, we sold around -- we issued INR2,300 crores in last quarter also, but premium was not there. So we will try in next quarter also. On your question on IBPC, we balance ourselves between IBPC, PSLC and securitization. So as we mentioned in Q2, we sold around INR1,000 crore portfolio and this quarter also INR1,200 crores. So it's a balance between IBPC and securitization. It is kind of a tool for our cost of fund also. So we'll see next quarter also.
And sir, third was on the employee base.
On the women -- sorry, on the overall employees and the hiring, it's purely routine. See, I think we had commented this earlier as well that during the COVID period, there were some amount of excess capacity or buffer capacity, which is built in the system more because people were going on leave and they were 14-day -- I mean, they were taking time to return and the counters has to be manned. So to that extent, we had some extra hiring that we had done. But as things are normalizing, as per our own business plan, things are getting rationalized. So there's nothing more to read to it.
Sir, can this further reduction employee base intended or are we towards the end of that?
I'm Sanjay this side. So in terms of HR, people around. So I think we already commented that we're really working on the productivity side. We've built a buffer, as Prince commented. But now things has become normalized. And so there not be any further reduction, rather we are hiring extensively, and I think more hiring can be done for the basis of the next year business plan.
We'll take our next question from the line of Nitin Aggarwal from Motilal Oswal.
Congratulations, Sanjayji and Uttamji on very good results. Two questions I have. One, if you look at Slide 14, the disbursement and advances [ yield ] [Technical Difficulty] past 1 year from 3Q FY '22 with the current quarter. I understand that this can be because of the scaling of the housing business...
Your voice is not very clear. Can you just repeat that part or maybe just come near to the mic.
Nitin, if you are on a speaker or hands-free mode, switch it to handset and speak, please.
So I was saying like if you look at Slide 14, the disbursement and advances [ yield ] have hardly moved up over the past 1 year. I understand that this can be because of the -- we are scaling up the housing business. But given the extent of rate hike we have seen in the system, this still looks like a little surprising. So if you can share some color on this? And why the disbursement yield during the third quarter have gone down over the second quarter? Very marginal decline, but any reason behind that?And the second question is on the collection efficiency. Now we have been reporting for many quarters in a row, we have been reporting collection efficiencies of more than 100%, this quarter being 107%. So how long to expect this? And what is really driving it? Is it like the bank book areas are higher which is driving this or is it like a prepayments which are coming through to drive such high collection efficiencies? Any color on these questions, please.
Nitin, I am Sanjay this side. So I'll answer the second one, right? So I would say that the credit compliance of the culture, I already commented in my speech that it is one of the best time for us as a lender. People have become lot much conscious around even borrowing money. And the whole repaying their EMI on time has come to be some kind of discipline, some kind of -- culturally, people have become more disciplined around it. And this I'm saying across products, across geographies, across buckets. So that is why the recovery percentage or the collection is north of 100%. And the kind of business momentum we are seeing, the kind of the exuberance in the customer we are seeing, I strongly believe that this year at least, I'm saying the next year -- next financial year '23-'24, I would be surprised if it drops. So that's my sense.So I think you will see this kind of same asset quality maybe for long time now. I can't comment or explain the long time, but the way, after the COVID, we have seen our gross NPLs coming down and the collection efficiency remains so strong. I have more hope than a worrisome aspect around it. So that's on the collection. I hope I answered your question, right?On your early one is around the business trend.
Management team are you still connected? There seems to be no response from the management line. Ladies and gentlemen, we request you to please remain connected while we disconnect and rejoin their connection. Please hold the line. [Technical Difficulty] Ladies and gentlemen, thank you for your patience. We have reconnected the management now. And Mr. Agarwal, I've unmuted your line as well.
Nitin, you're still with us?
Yeah, I'm here.
Sorry about that. So if I understand clearly, your question on the first part had two parts. One was that the disbursement overall on a year-on-year basis looks flattish on a overall yields given the timing as well.
Yields have not gone anywhere year-on-year. And this quarter, the yields have come down on disbursement. These two parts.
Sorry. Yields has not gone upwards year-on-year?
From 12.7% to 13%. And this quarter it has moved from 13.1% to 13%.
Nitin, actually for this quarter, this was active quarter. In October, it was Diwali festive. So because of that, in that particular month, you get business. So yield was slightly lesser than last quarter Q2.
Nitin, the decline is only 5 bps. And that's also partly because the mix of the commercial banking has increased slightly. Our yields otherwise has held up if you talk about the retail.
So can I assume that we have been able to pass on the rate hikes that you are seeing in the system to the customers at incremental level because the yields otherwise are staying flat otherwise?
I mean, on the vehicle side, very clearly, there has been a pass on. And as I think Uttamji also articulated in his speech, there has been a 9 bps of sequential increase in terms of yield disbursements. Of course, [Technical Difficulty] banking book, if you see the overall yields have jumped up significantly given that they are floating rate and repo-linked. In terms of SBL, it is broadly flattish. But again, you'd agree with me that that book is already at a slightly higher yield. So yeah, I think not really worried too much in terms of passing on the incremental cost.
So if you see the Slide #13, our NII almost fell in the last 4, 5 quarters.
And just a follow-up on the other question that I had around collection efficiency. So with collection efficiency being more than 100%, does it imply that we are recovering from the bank dues or we are having prepayments or can there be any other reason?
It's a [Indiscernible] also on loans which are we past due where we have been able to recover now because business activity has sustained and -- so our collection efficiencies don't include prepayments, Nitin, as we have disclosed. So this is primarily -- and I think we have also articulated that that what we saw this quarter was some very strong collections both across buckets as well as across products. So that in some way signifies that the underlying cash flows in the underlying businesses has been very, very strong.
We'll take the next question from the line of Mahrukh Adajania from Nuvama.
Sir, my question was around the cost of funds. You have obviously made detailed disclosures on incremental and outstanding cost of funds and they've not moved much if you compare it to most other banks that have reported. More importantly, if you just calculate from balance sheet averages and cost of funds are within much less than even what you've disclosed obviously because you disclose on daily balances. So how is it that relative to the system you've done much, much better on cost of funds despite hike in CDs? And what is the outlook for fourth quarter and longer term just in terms of cost of funds or cost of deposits? That's my first question.
Mahrukh, first of all, we haven't done any CDs in this quarter, as we have disclosed. Our CDs have in fact been coming down. Now as far as the overall cost of funds is concerned, you would agree that we -- our cost of funds were quite high when we started the bank. It was around 5.95% unlike some of the larger peers that you are comparing us with. And we have benefited from some of the repricing on that book. Now of course, if you look at the incremental cost of fund, I think that has -- as we have disclosed, it's about 23 bps up in this quarter and that is in line with the broader industry. So I don't think there's too much to read there.
And secondly it was a mix of our funding rate like we did securitization and we raise low-cost refinance also, which helped in our cost of funds -- overall cost of funds. And in terms of Q4, I think as we mentioned that we should be within what it was last year, overall year. It was around 5.95%. So we expect that we should be in that range only. And for last year, very difficult, we are also reading the market. So as we mentioned in our commentary also that this is key monitorable for us and we'll with the time.
And my next question is on the ECL circular. Also, have you been filing mock runs with the RBI? And obviously, your provisions, you've given a detailed slide on your provision to AUM in excess of 2%. Given that, do you see any major impact from IFRS on your book? I mean, any comment that you can give on the IFRS circular?
So Sanjay this side. So again, this is just a paper [Technical Difficulty] and it just recently came. So it's difficult to comment as of now because once the overall scheme of things are settled down. But of course, we are filing with RBI. And by that, we have a positive impact than a negative one. And so I strongly believe that once it is implemented, it will have a neutral to positive impact on us.
And why is that so because of early provisions on certain buckets or what is it? Like if you could just...
So you know about that. We provision so much and our net credit losses very less -- secured book, of course, that's why we have NPLs less. So I think you're absolutely right because we provision more than what is required. But just to make our balance sheet stronger and stronger, but in ECL we have to just estimate. So I think this is that. It has neutral to positive impact.
Our next question is from the line of Ashlesh Sonje from Kotak Securities.
Congratulations. Just a couple of questions from my side. Firstly, a follow-up to one of the previous questions.
Mr. Sonje, I'm sorry to interrupt. If you're on a speaker mode or hands-free, please switch to handset and speak.
Congratulations. Firstly, a follow-up on one of the previous questions. On the cost of funds front, has there been any rundown of any older higher cost borrowings on our book? And if yes, how long do you expect that to continue?
So we don't have any grandfather borrowing right. That has already been closed. This is now 6 years running. So 3, 4 years, we had those grandfather borrowings. So this is in normal course of business.
And secondly, on the TD front, on the term deposits, there has been a decent traction on the retail as well as bulk TDs. They're up by 10% to 15% quarter-on-quarter. Can you share the blended cost of deposits on the bulk TD book? If you can answer this?
We need to have blended cost of...
Bulk TD book.
So my bulk TD cost is around 6.4% in 9 months for this year, means overall TD cost I'm telling you, fix deposit cost.
So this includes both the retail as well as bulk TD?
Retail and bulk, both.
Is it possible to bring out the bulk TD cost separately?
So Ashlesh, I think we have commented earlier as well that typically, we don't prefer bulk TD. I mean we have been articulating that that there has been an internal drive to go more granular, more retail. And what we are measuring right now is CASA plus retail TD index which you see is now about 70%. So honestly, on the wholesale side, we generally prefer to give lesser rate as compared to retail. And on the retail side, we generally have a slightly higher mark-up. So while we don't disclose this number independently, but if you ask me, it should broadly be similar or slightly lesser.
And just one last data-keeping question. Have we hiked the interest rate on new loans in the SBL book this year so far?
Sorry, come again.
On the SBL book, have we hiked interest rates on new loans during this year so far?
Not much. Still are not very high rate of interest book. So it's a very long-term book. So yeah, we are not -- we don't want to push that rate on a higher side.
Our next question is from the line of Renish Bhuva from ICICI Securities.
Congrats on a good set numbers. So sir, my first question is on yields on the business banking side, which is the number almost...
Mr. Bhuva, sorry to interrupt. Could you please speak on a handset mode.
So sir, my first question is on the business banking yield. So the yields on the business banking side has been up by 100 basis points. I understand that it's a floating rate book, but if you can help me with the reset period. And what is driving this high -- I mean, are we able to pass on the hike or there is like a different set of customers we cater to where in large banks are not there?
So this is Vivek here. The entire business banking book is linked to the repo rate and it's a quarterly reset. So any rate hike which is there is passed on the next quarter. So every 90 days there is a reset for each contract.
And then in presentation what we disclosed is the disbursement yields or its blended yield?
No, I'm saying the portfolio yields have gone up because it was -- the entire book is linked to the repo rate. And even in case of incremental business what we are doing, we are sourcing at the incremental higher rate because the overall regime has changed. Even the competition has increased rates, but obviously not to the extent that what repo rate has been increased, but there is a significant rate hike on the new acquisition.
And sir, my next question is on the bit of clarification side. So one is on the AD1 license. So I mean, I know we have applied, but would you like to comment on the status of that? And number two is on the RBI divergence report. I mean, does the audit had concluded? And what's the outcome of that, if any?
On the divergence side because we haven't published anything so that should be taken that the RBI -- the report is in well in place and is in the shape. And your other one, the AD1 license, yes, we applied in the month December and we are waiting for that. And of course, the regulatory has to decide, but we have applied for that.
And any timeline? I mean, historically, any evidence within what time...
Sorry, we can't comment on that, but it generally takes maybe around 5 to 6 months. So generally takes 5. So it's in general statement, not expecting to us. So -- and we applied it in December.
Our next question is from the line of Nidhesh Jain from Investec.
Sir, last quarter you sounded a bit cautious on growth front, I think that deposit cost has gone up. What is our stance on outlook on growth now? And going into FY '24, what is your outlook on growth?
So the last time also people took -- read more into that. But if you have seen our growth in quarter 3, it is absolutely in line what I commented. And because it's not about only an asset growth, we need to see how deposit is being built, at what cost, at what tenure, at what rate. So I think we have -- we want to play very balanced role because we really want to build a very sustainable bank without any noise in any quarter. So I strongly believe that quarter 4 is always better than quarter 3, and we are absolutely on track.What I commented or promised as a team from quarter 1, we are supposed to deliver that. And I would say, we are on track because our property is growing north of around 27%, 28%. Our asset is growing north of 27%, 28%. Deposits, we are playing a very calibrated game where we don't want to borrow at higher rates. So we want to be mix of them. Our digital properties are doing well. The SBUs are performing well. We are building our governance structure. Asset quality remains strong.So I think overall, we are very happy the way we are building ourselves from last 9 months. It remains very tough because the kind of interest rate factors has gone up. We still managed to manage our cost of money at around 5.85%. So in that sense -- and now what, another 75 days for this year, so you will see the result by April 1 or 2. So overall, I would say, I'm very happy that the team has come together, has navigated these challenges with the flying colors. So very optimistic about our future, but need to take -- call every quarter. And because it's a very balancing game, you can't comment or we can't be over aggressive or we can't be just look for growth at any cost. So we have leaned hard way. So although remain very cautious, but very optimistic.
And secondly, sir, our share of unsecured have increased to 7% of the book, which was quite negligible 3, 4 years back and we have always focused on secured segment. So what is our strategy on the unsecured? What percentage we would be comfortable with? And I see that the large part of unsecured has been driven by credit card book. So if you can also share some comments on the asset quality and credit cost in that part of the book?
Absolutely. So unsecured book has three, four linkages where we do from credit card, we do straight to our existing depositors and we also want to build something around the commercial customer for QR code? So everybody is building their business. We are in a very initial stage. Overall, we don't have any significant numbers around it. So I would want to wait for maybe 2, 3 quarters to really comment on the quality of asset, on the size we want to pursue around it. So I think it's very early for us to comment on anything to be very honest.So give us some time in maybe 2, 3 quarters to really spell out our strategy around unsecured. But I think as an organization, we're very happy that we are driving all those opportunities, whether it's through QR code, through credit cards, through your data analytics on your existing depositors. And so it's -- we are not running that program on FOS. That is more through digital, data-driven kind of story. So give us some time then we'll comment more on this.
Nidhesh, Prince here. Just to add on that specific 7% number. Not all of it -- I mean, while it's classified as unsecured, but bulk of it, like on credit card, again, as the portfolio is growing, it's mostly the out-of-pocket that we have at any point in time depending on the spend in that particular month. Not all of it is actually a loan, so to speak. But I mean, it doesn't revolve. On the second part, there is a decent chunk of SBL book there in that 7%, where for various reasons, the collateral might be imperfect or in the process of getting perfected. And because of that, it's classified as unsecured. But if you look at the core business wise, it's not really unsecured, unsecured.
So INR1,000 crore number that we have disclosed in the credit card, isn't it revolver or...
Sorry. That INR1,000 crores is the out-of-profit not the revolver.
Our next question is from the line of Hiral Desai from Anived Portfolio Managers.
So if I just club what Mahrukh and Nitin asked earlier, so just wanted to get your thoughts on margin over next, let's say, 4 to 5 quarters. Because if I see the incremental spread, they are about 70 basis points lower versus the bank book and the deposits might continue to get repriced at least for the next couple of quarters. So I wanted to get your thoughts on margin actually for next probably a year or so?
So again, I would say, it's difficult to comment now because, again, it's an evolving story that what type of interest rate cycles we are all are expecting. My sense is that we are nearing to an end to a higher interest rate regime, maybe one more or maybe not more than two. Our inflation is in our control. We are moving as an economy. So -- and as I've already commented that bank is about balancing so many things. It's not only about NIMs. There are so many other things, and every year something plays out. Like this year, there's no treasury, no PSLC. But we are still able to manage our NIMs and other incomes from other sources.So I would rather won't comment on this by next call because then there will be lot much clarity on many tendencies around us and also how the whole year would be looking in terms of interest rate and all those things, how we really play our quarter 4 also in terms of our business yield. And so I think it's more around evolving story as of now. So give us some time. But as I already commented that NIMs are just one part of the whole balancing.As a bank, we remain very strong. We know from where the deposits should come. We know how to lend. We know how our assets are behaving. We know how we are building our team, how the SBUs are performing. So I think those things are more -- for me as a CEO, are more important because interest rates are more transitory. Maybe 1 year we might have 1% less ROE. But as we always comment that AU is here for long-term, forever kind of story which is built on scalability and sustainability. So for me, that is more important. And I'm feeling very much confident by passing every quarter that we are building more and more well foundation, good foundation for that yield building on it.
Fair enough. The other is on the core other income that you mentioned in the presentation. So is PSLC a part of the core other income or it is outside of the core other income?
Yes, Hiral. So PSLC is part of the core other income, treasury profits are not.
And Sanjay, it is the first time on the investor deck where you've spoken about granularity of the fee income. So just wanted to get your thoughts on that because credit card is obviously showing good traction? And on the distribution side also we have tie-ups now on insurance or mutual fund and broking. So I think most of the bases are covered. So how should we look at the core fee income growth over the next 2 or 3 years?
My friend, still we are waiting for our AD1 license which can be a huge other income in next maybe 3 to 5 years. We are building wealth product which is just in nascent stage. We haven't seen any kind of other income from there. And of course, our insurance is performing well. The cross-sell is performing well. Of course, the credit card will become bigger and bigger, better and better. Our QR code is performing well.So as I commented -- and what I've learned in the last 5.5 years is that banks are not -- doesn't run from one revenue stream, it's a pool of many revenue streams. Some years, something doesn't work and something works very well. So we need to be very cautious and we should be very smart enough to figure out that what particular year, what kind of stream can work. And there is already a long-term steam like insurance, wealth product, credit card and all those things. So I think it's a balancing and mix of so many things. But I think we are arriving on our other income aspect which was not there 3 years back.So you will see better and better in terms of our cross-selling ability, in terms of building a lot many hooks for our customers so that they just bank with us or just they deal with us. So I'm very happy with the way we have built our product. And that is why our OpEx was also very high for so many years. But I think you will see that results coming out maybe next -- for next year also -- next year onwards.
Our next question is from the line of Punit Bahlani from Nomura.
Sir, two questions from my side. Firstly, on the margins a bit. Like on the vehicle book, you mentioned that you have been able to pass on the rate. But if I look at the last 3 quarter advance yields, they have only increased by around 10 bps. Just on a disbursement basis, if I see the total disbursements made in the past 2 quarters, they are around over 35% of your vehicle AUM. Just on [Indiscernible] I think the yield impact would be more. So is it like the -- because of competition we're giving [Indiscernible] we have not been able to pass like some color on that?And the second thing on the credit cards...
Punit, your audio is not clear at all. Voice is coming muffled.
Is it clear now?
No.
Punit, maybe we can check your connection and rejoin you to the question queue. In the meanwhile, we'll take our next question, that's from the line of Prabal from Ambit.
Congrats on good numbers.
Prabal, I'm sorry, we are not able to hear you clearly.
Am I better now?
No. I think you're in a no network area or something. It's not very clear. Are you on a hands-free or airpods? Please switch it to handset mode and speak.
So congrats team. My question was, sir, if you've seen the retail disbursements...
Sorry to interrupt. Management team, are you able to hear Prabal clearly?
No, unfortunately.
Prabal, we'll check your connection and rejoin you to the question queue. We'll take our next question from Pallav Garg from Star Health.
Sir, my first question is on the changes of the CASA ratio. So while I understand that there was pressure on the rate, deposit rate, so have you seen any migration of the retail customers from CASA blocking in the long-term rate in the term deposits or some other trends that you have got in?
Pallav, Rishi Dhariwal here. I look after liabilities for AU Bank. You're right that, yes, as with other banks, there has been a trend for some of the customers to move their deposits to move their -- some of their savings to deposits because I think when the rates came down in the last couple of years, that was really fast. And now when the rates have come up, customers haven't seen these kinds of rates in the last few years and they sort of want to book their deposits at these kind of rates.But if we talk about the CASA ratio, what I would say is that we sort of added to our branch network in the last couple of years. And our acquisition continues to sort of grow. And therefore, we are sort of comfortable to be having the CASA ratio in the range that we are in. And we continue to build our retail portfolio, retail deposits, as what Sanjay and Prince have mentioned earlier. And you would see that the current account volumes have actually gone up for us since March. And therefore -- I mean, we continue to build on that traction both for savings as well as current accounts.
So how should we look at this going forward, let's say, next 2, 3 quarters in the time there is a pressure on deposit rates particularly?
That I think is something that one will only have to see how the industry plays, because -- I mean, all banks have really gone aggressive around their TD rates. We all know that. And we obviously have to keep pace with the rate hikes which have been done by -- I mean, all the universal banks as well as -- I mean, the PSUs as well as the private -- large private sector banks.So the only thing that I would mention is that maybe the spread between us and some of the large private sector players have actually come down. And our focus continues to remain on building the transacting book, what Uttam sort of mentioned in his speech. And that I think is the most important part of what we have been doing. The savings number of customers -- the transacting accounts at 57% and that has moved up in terms of number of transactions per transacting customer moving from 27% to 33% a month. And the current account transactions moving to 75% from 69% per month for almost 70% of our current account customers is what basically gives us the confidence that, yes, the customers are basically using our account to do their transactions. And therefore, this, like what Sanjay also said, is a transitory phase and you play it as it comes.
Sir, next question is on the percentage of refinancing that you're leveraging based on your housing finance book. If you can give some quantitative number on that? You said that the housing finance can be used for -- to avail an NHB finance.
So what's the question? So could you...
Just wanted to understand the quantum of it, let's say, from the whole borrowing traction.
The refinance as a percentage of the overall borrowing?
Yes, yes.
Most of it is refinance only.
But only the housing finance...
You'll see that our CD borrowings kind of forms about 9% of our overall liabilities. So bulk of it will be refinanced. We of course have some Tier 2 bonds and other things, but bulk of it is refinance, which is through NABARD, SIDBI, MUDRA and NHB.
So now just moving back to the asset side of thing. So if you can give some color on the yields on the new vehicle, used vehicle, tractor and the two-wheeler? And maybe you can point to...
Sorry, Pallav, we don't -- we haven't disclosed that number anywhere in terms of various segments. So we'd like to deal with the overall yields business number, which is already disclosed.
And anything about -- any color on the gross NPAs in this particular sub-segments?
Sorry, I missed that part.
The gross NPAs for these sub-segments, like let's say, the new vehicle, the used, tractor and two-wheeler? Any color on that?
I mean, both the disbursements and the portfolio yields at a sub-segment level, we haven't disclosed. We'll prefer putting out the whole number.
And in the SMBL segment -- yeah, SBL segment, if you can give some color of where the distribution of this INR18,000 crores in terms of, let's say, either industry or geography-wise? Any color on that basically only ballpark numbers or any sense would be great.
The question is that in SBL business you want a geographic split?
I just wanted to understand how does that book look like?
So I don't know if you -- Pallav, we just did the AU Insight on 4th of December which was on SBL business. That presentation is there and we have given a link in the presentation itself in IR presentation as well for this quarter has all the details around the sub-segments, the geographical split, the ratios from various...
Yeah, we'll refer that one.
All of that is available.
Our next question is from the line of Punit Bahlani from Nomura.
First is on the yields business. You mentioned that you have been able to pass on the repricing towards your customers. But on the last 3 quarters, the incremental increase in yields that you have reported is around only 10 bps. Just if I compare the disbursements of the last 2 quarters, they are around over 35% of the yields AUM. So what am I missing here? Like, because 10 bps seems to be quite low. Is it because there is increased competition, you have to do loans at lower rates, like which is common with the bank, like which is common with the commentary that other banks are reporting? So first is on that.Secondly, on the credit cost, even other banks have utilized their floating provisions, which even you seem to have done and accordingly the credit costs have reduced. Any color on this like how much -- do you plan to do this in the near-term? What will be the extent of it, just on that?
So if the first question is on Wheels, what I understand is you're saying that in the last 3 quarters, the disbursement yields have only gone up by 10 bps?
Yeah.
Punit, Bhaskar here. If you look over Y-o-Y, we have gone up by about close to 65 bps there. And just over last quarter, we have gone up by 10 bps. What does happened is that by the time you knew the older rate and the new rate, the blending takes time, and that's all it is. But there has been a clear transmission of rates starting from the beginning of this year itself where every month-on-month we have been -- barring the month of Diwali where it just takes a small blip out there. But otherwise, by design -- if you ask me, by design, we are on the upward trajectory and by a product mix we are able to handle that and we do not really see that getting greatly impacted. It's just a matter of the older book, new book and by the time the rate impact gets to kick in, that's all.
As far as the second part of the question is concerned, if I understand that correctly, what you're saying is we have created a floating provision and there is a bit of contingency that we still have on the balance sheet which is related to COVID. And as I commented earlier, we'll see at the end of the financial year, depending on the guidance from the board how to better utilize that.
Ladies and gentlemen, that was the last question. I now hand the conference back to Mr. Aseem Pant for closing comments.
Thanks, Inba, and thank you, everyone, for joining us and for your support. On behalf of the entire AU team, we wish you a happy, healthy and prosperous 2023. Please reach out to the IR team for any further questions.
Thank you. On behalf of AU Small Finance Bank, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.