City Union Bank Ltd

NSE:CUB

Earnings Call Analysis

City Union Bank Q1 FY25: Double-Digit Growth and Strong Financial Performance

City Union Bank's Q1 FY25 showed a positive shift with a 10% year-on-year growth in advances, reaching INR 46,548 crores. The bank reported a 16% increase in PAT to INR 264 crores and a gross NPA reduction to 3.88%. The bank's return on assets (ROA) restored to 1.5%, while the cost-to-income ratio improved to 49.34%. The successful implementation of digital lending for MSMEs and secured retail loans promises future growth, maintaining cost-to-income ratios between 48-51% for the year. The bank aims to continue double-digit growth and maintain an ROA above 1.5% .

Positive Momentum after a Decade

In the first quarter of financial year 2025 (Q1 FY '25), City Union Bank reported a significant turnaround with its first positive growth in advances after ten years. This forward momentum is marked by a notable 10% year-over-year increase in advances, rising from INR 42,405 crores to INR 46,548 crores. This reflects the bank's ongoing recovery and adaptation to market conditions, fueled by new digital lending initiatives.

Robust Growth in Interest Income

The bank's interest income also witnessed healthy growth, increasing by 10% from INR 1,266 crores in Q1 FY '24 to INR 1,389 crores in Q1 FY '25. The yield on advances slightly improved to 9.59%, showcasing a gradual enhancement in the bank’s lending efficiency despite the lower figures compared to the previous quarter.

Decreasing Non-Performing Assets (NPAs)

City Union Bank achieved a commendable reduction in both gross and net NPAs, with gross NPAs decreasing from 4.91% a year ago to 3.88% in Q1 FY '25, and net NPAs dropping to 1.87% from 2.51%. This reflects better asset quality management, with recoveries exceeding slippages—in Q1 FY '25, recoveries tallied INR 226 crores against INR 178 crores in slippages.

Strategic Focus on Digital Lending

The bank has pivoted towards enhancing its digital lending capabilities, implementing a digital lending process that automates essential checks to streamline applications below INR 7.5 crores. This initiative aims to tap into a wider retail market, with technologies developed to support retail products like housing loans and loans against property, expected to launch piloting phases by September 2024.

Cost Management and Profitability Prospects

Despite the shift toward digital initiatives, the bank anticipates a cost-to-income ratio within the range of 48% to 51% for the current financial year. This implies a temporary drag on profitability as the bank frontloads expenditures associated with technological upgrades. Nonetheless, management asserts that profitability will stabilize and start contributing positively post initial implementation phases.

Future Guidance and Outlook

Looking ahead, City Union Bank is optimistic about maintaining a return on assets (ROA) of at least 1.5%, benefiting from the favourable credit environment and improved credit cost management. The bank expects further moderation in credit costs, potentially lowering from INR 1,000 crores last year to around INR 800 crores, while aiming to deliver consistent growth in profitability as digital lending fully ramps up.

Long-term Strategy and Market Position

In the longer term, the bank’s management is focused on a cautious growth strategy that aims to encapsulate sustainable practices rather than rapid acceleration, putting forward a target to exceed industry averages gradually. Given its historical performance, management expects to capitalize on this balance, enhancing their market share while ensuring financial stability.

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to Q1 FY '25 Earnings Conference Call of City Union Bank hosted by AMBIT Capital.

[Operator Instructions] Please note that this conference is being recorded.

I would now hand the conference over to Mr. Prabal Gandhi from AMBIT Capital. Thank you, and over to you, sir.

[Prabal Gandhi, analyst]

Thank you, Ritija. I welcome everyone on the first earnings call of City Union Bank for fiscal 2025. On the management side, we have Mr. N. Kamakodi, MD and CEO; Mr. R. Vijay Anandh, Executive Director; and Mr. J. Sadagopan, CFO.

Without further ado, I'll hand over the call to Dr. Kamakodi for his opening remarks and then we can follow it up with Q&A. Thank you, and over to you, sir.

[N. V. Kamakodi, executive]

Good evening. Hearty welcome to all of you for this conference call to discuss the unaudited financial results of City Union Bank for the first quarter of financial year 2025. Board approved the results today, and I hope you all have received the copies of the results and the presentation.

As you are aware, RBI vide its letter dated 28th May 2024, given approval to appoint Mr. R. Vijay Anandh, Executive President as Executive Director for a period of 3 years. Subsequently, he was Co-opted as Additional Director, Executive Director by the Board at its meeting held on 24th of June 2024. You might also have seen the announcement of our Annual General Meeting to be held on 22nd August 2024, which will be happening through virtual mode.

On behalf of our Board, I invite you all to participate in the AGM. During the Q4 financial year 2024 call, we had stated below our expectations for financial year '25. With all new digital initiatives, together with the strengthened top and senior level management, we could see some visibility in the growth front growing forward. Post MSME digital lending model will be expanded to secure retail lending such as housing, LAP, micro LAP in Q1 financial year '25.

On asset quality front, we will continue with the trend of reduced slippages coupled with the improved recovery for the current year. We have restored our ROA to our long-term average of 1.5 percentage, and it will continue. We will see the benefits of digital lending process in the coming quarters. Since we are taking the cost upfront, our cost-to-income ratio will be slightly higher than the current year. And once full benefits of the digital lending and other initiatives transfer into growth, the cost-to-income ratio will start to come down. By and large, the numbers are in tune with our expectations.

Historically, if you see our credit growth in the first quarter of every financial year, we used to have a negative growth compared to the last quarter of the previous financial year. But this year, we had registered a marginal increase in advances growth in the first quarter of financial year 2025 compared to Q4 financial year '24. We are seeing these positive numbers after 10 years. We had registered 10 percentage advance growth in Q1 financial year '25 year-on-year, and our advances closed over and above Q4 financial year 2024, that is INR 46,481 crores, and increased from INR 42,405 crores in Q1 financial year '24 to the INR 46,548 crores in Q1 financial year '25. BCG have completed their assignment with respect to MSME lending, unsecured products in June 2024. And now we could see the implementation of digital lending starting to give initial results. Apart from our core strength of MSME, now we are slowly spreading our avenues in secured vertical like secured retail, micro LAP, housing, et cetera.

We have piloted the digital unsecured lending only for existing customers, predominantly salaried and yield around 13 to 14 percentage with a complete digital workflow application. We have just built a small portfolio of INR 3 crores to INR 4 crores on this particular preapproved credit. So we'll just wait to see the behavior before we do any scale up or whatever, we have made a very small beginning in this.

Our deposits stood at INR 54,857 crores for Q1 '25 as compared to INR 51,655 crores in Q1 '24, registering a growth of 6 percentage. Average CD ratio of first quarter financial year '25 stood at 84 percentage. Theoretically, we can grow advances by about INR 3,300 crores with existing deposits and surplus funds. On asset quality front, we had stated that we will continue to have recoveries over and above the slippages. For the current quarter, the total slippage is INR 178 crores, while the total recoveries is INR 226 crores, consisting of INR 192 crores from the live NPA account, INR 44 crores from technically written off accounts, resulting in recoveries more than the slippages.

As a result of this, our gross NPA percentage has sequentially decreased from, let's say, 4.91 percentage in Q1 financial year '24, 4.66 percentage in Q2 financial year '24, 4.47 percentage in Q3 financial year '24, 3.99 percentage in Q4 financial year '24 and now further reduced to 3.88 percentage in the current quarter. Similarly, our net NPA number has reduced from INR 853 crores and net NPA percentage to 1.87 percentage in Q1 financial year '25 from 2.51 percentage in the Q1 financial year '24 and 1.97 percentage in the Q4 financial year '24.

Our interest income had grown by 10 percentage in Q1 financial year '25 compared to the corresponding period Y-on-Y, and increase to INR 1,389 crore from INR 1,266 crores in Q1 '24. Our yield on advances stood at 9.59 percentage for Q1 financial year '25 as against 9.53 percentage for the same period last year, and it was 9.83 percentage in the Q4 financial year 2024, and NIM stood at 3.34% for the current quarter. Generally, earlier banks were permitted to charge the penal interest on flexi-loan accounts, and the same was discontinued from April 2024, further due to the changes in the RBI guideline. Now banks are permitted to charge the same as penal charges. If we add back this portion of the penal interest compared to what we were doing for the earlier quarters, our yield on advances would have been 9.67 percentage and our NIM would have been 3.6 percentage.

Our cost-to-income ratio for financial year -- I mean, Q1 financial year '25 stood at 49.34% as compared to 51.26% in the Q4 financial year '24, showing a sequential decrease. The charges paid to -- the fees paid to BCG for the digital lending implementation was over by Q1 financial year '25. And the cost of the new avenues of retail business will take at least 6 quarters to get adjusted with the increased business volume.

As explained in the earlier quarters. So this year, there will be, let's say, all the expenditures are taken upfront. Income will start picking up only towards the end of the year. Next year, there will be breakeven. And like say, after that only, we will be having profit getting added because of these initiatives. Because of this, as we discussed in the earlier quarters, our cost-to-income ratio will be in the same range of 48% to 51% for the next 4 to 6 quarters. And as per our expectations, our ROA stood at 1.51% for the Q1 financial year '25 compared 1.40% for the corresponding period last year.

Our PCR has improved to 73% with technical write-offs and 53% without technical write-offs in Q1 financial year '25 as compared to 70% with the technical write-off and 50% without technical write-off for the corresponding period last year. Overall, SMA2 number of the advances also currently stands around 2% as explained in the earlier quarters. We had achieved a PAT growth of 16% and our PAT stood at INR 264 crores against INR 227 crores in Q1 financial year '24, that is 16% growth year-on-year between first quarter last year and first quarter of this financial year.

To sum up, with the help of the like say digital lending and better and efficient underwriting methodology we hope our advance growth will be back on track. We are exploring various avenues of advance growth in addition to our core strength of MSME. We are putting our best efforts to reach the industry level growth as soon as possible.

So in the last con call, many questions were asked about the, let's say, what is the guidance and all. I refrained from giving any guidance. And I said you have to make a call from the numbers and now we are able to see some amount of increase in the numbers. And we are working hard to ensure that there is a stable growth going forward.

And we have -- as we have seen, we have reached, like say, double digit for 30th June to the 30th June and also first time for us, like say, positive growth in the first quarter after about 10 years, which is giving us sufficient confidence that things should be better as we move forward.

And ROA is expected to remain at our current level of 1.5% plus. We should achieve our PAT growth with the help of reduced slippage and provision requirement. As you have seen because of the other upfront, like say, expenditures and all what we are taking.

So we have to wait for maybe 2, 3 more quarters to see the operating profit showing a corresponding increase compared to the business growth. Our cost-to-income ratio should remain in the range of 48% to 51% for the current financial year. So as discussed in the previous con call once again, we are building our capacity both in human resources and technology infrastructure for future growth engines, particularly retail. So there will be a drag in the, like say, as we have seen, like say, in the profitability as explained earlier. So it will be reaching breakeven only next year and probably adding to the profit kitty by next, like say, beyond that.

So with these opening remarks, I open the forum for questions.

[Operator]

[Operator Instructions]

The first question is from the line of Harshada Gite from Prabhudas Lilladher.

[Harshada Gite, analyst]

So we see that the fee income has increased Q-on-Q. So what are the drivers? Does it improve the SME income?

[N. V. Kamakodi, executive]

No. As explained, some amount of incremental fee income has come through your both, like say, the -- as I said, the interest income, which is getting -- which had to be booked as other income for the SME accounts. And also some amount of, like say, positive momentum we are seeing in the insurance front. So these 2 are adding some amount of like say, push for the other income growth.

[Harshada Gite, analyst]

Okay. Got it. And my second question is what are the drivers for the decrease in the other operating expenses Q-on-Q?

[N. V. Kamakodi, executive]

See the -- I'm not saying that, like say, you basically have the other expenses are by and large, like say, there is a sequential what you call from 369 to 363. But year-on-year, there is a growth of 21%. We don't expect any major decrease in that going forward. In fact, our annual income -- annual increments will be coming only in the second quarter and all. So like there will be a like say -- we don't expect any drivers. But the -- once the productivity picks up, as we said, it is few more quarters away, like say, the increase in the income will be there. With the stable cost perspective, there will be a reduction in the cost-to-income ratio.

So the -- we don't expect any sequential decline in the cost drivers in the other expenditure.

[Operator]

[Operator Instructions]

The next question is from the line of Rahul Malani from Sharekhan by BNP Paribas.

[Unknown Analyst]

This is Vijay here from Sharekhan. My question is, could you give us some more light on your digital initiatives, and how this will benefit across the board?

[N. V. Kamakodi, executive]

Yes. In fact, we had a detailed discussion in the last conference call. We appointed BCG last year for 1 year, like say, contract which got ended on 30th June. Using them, they helped us to build the digital lending processes, API integrations and all such things and some of our peer banks had earlier done that, and we were waiting for them to settle after that, we started.

So now almost our, like say, we started with less than INR 3 crores, then we extended it to INR 5 crores and currently, as per the RBI's definition of regulatory retail portfolio is INR 7.5 crores. So from all the, like say, proposals less than INR 7.5 crores goes through this digital software now. It basically automates starting from the KYC to Aadhaar number check to PAN number check to, like say, your CIBIL check too, then it analyzes your, what you call, GST returns on an online basis, then it analyzes the account statement through software, then it analyzes the, like say, account operations after that your income tax and other financial returns then it fits into our policy. And then distinguishes the proposals, whether it can be like say, given or it cannot be given or it has to be referred to the credit for the manual check if at all if any deviations are required, but proposals are, by and large, are doable. So the first product was put on track way back in, like say, November.

So after that, like say, subsequent products where, like say, changes were done. Similarly, the -- like say, both for MSME and also for retail products like housing loan and LAP and all. So all the basically fundamental checks and putting into the system are automated. And that process has, like say, by and large, complete with, like say, after completion we, like say, the BCG also, like say, completed their, like say, assignment, and this is where we are currently.

[Unknown Analyst]

Okay. Just one follow-up question is, how much expenses you have made for this digital lending process?

[N. V. Kamakodi, executive]

Yes, we discussed it in the last con call, we gave about INR 25 crores to INR 30 crores to, like say, total fees to the BCG, which works to about 2 to 3 percentage of our overall PAT. This is apart from the, like say, the software cost and the implementation API's, most of these API charges are on the pay-per-use basis. So the software comes to about INR 10 crores to INR 15 crores or something like that. So this is the overall expenditure on this particular project.

[Operator]

[Operator Instructions]

The next question is from the line of Punit from Macquarie.

[Punit Bahlani, analyst]

Yes. Sir, first is on the growth front. It's been disappointing like last year, like I remember FY '24, you were heading towards the double-digit growth. I know there is a seasonality in 1Q and all that stuff, but still it's flat on a low base, it's very disappointing. So are we still targeting the double-digit growth? What are the reasons for the lower growth this quarter if you could elaborate on that?

[N. V. Kamakodi, executive]

See, as I told you, cyclically first quarter, we always used to have a negative growth and after 10 years for the first time our Q1 figures are more than Q4 and like say, we are able to see some initial momentum after whatever investments, whatever practices we have done on all the things we have been discussing so far.

So like say from -- as I explained in the last con call once again, the December 2022 to December 2021, we had a 14 percentage growth. But that 14% came to, like say, almost flat or 1 to 2 percentage for December 2023. So now after that, once again, the growth has started in a slow and steady fashion. You've already started seeing 10 percentage first time double-digit growth after multiple months, and we are working our best to ensure that this momentum is taken care and get to the next level.

[Punit Bahlani, analyst]

Double-digit target remains, right, for the end of FY '25?

[N. V. Kamakodi, executive]

Yes, already, yes, that's what. Already we have reached this and it has to -- we are working to ensure the growth rate further accelerates from where we are.

[Punit Bahlani, analyst]

Okay. Okay. Also, on the ROA target, it will remain 1.5%. So that also holds there, right, continues? the ROA target that you...

[N. V. Kamakodi, executive]

About 2 quarters back or so, we got back to that 1.5 percentage trajectory. So some amount of -- as I told some amount of upfront expenditure, we are taking and some increase in the cost is there. So there is some amount of impact on the operating profit, but we are still able to make 1.5% because of, like say, favorable conditions with us in terms of the asset quality. Now the slippages are, like say, less than the, like say, recoveries. So because of this, we are getting benefit from the asset quality, I mean, credit cost, which is helping us to maintain this, and we have enough elbowroom in this factor for at least another like say, 4, 5 quarters or so.

With this only, like we are talking about, like say, maintaining the 1.3% ROA.

[Punit Bahlani, analyst]

Right. So these 4, 5 quarters, you expect the strong recoveries to continue, right? Another 4,5 quarters if I can take it in that.

[N. V. Kamakodi, executive]

Yes.

[Operator]

[Operator Instructions]

The next question is from the line of [indiscernible] from Equirus.

[Unknown Analyst]

Sir, I wanted to ask that the competitive intensity on MSME loans has increased given the recent digital push by bigger players on MSME loans.

[N. V. Kamakodi, executive]

See, as we have been saying that it's not that competitive intensity, which is going through a major thing and all because this competitive intensity is in place for almost a decade, which perhaps started as I have been repeatedly saying when ICICI Bank took over 1 of our peer banks, Bank of Madura, 2 decades back. And all new generation banks are with us for almost more than a decade in every places. And the competitive intensity is pretty much there for almost a decade, if not more. More than anything else, in fact, like say, last year or maybe about, like say, 4, 5 quarters back you had what you call some amount of insane pricing and all, those things also cooled subsequently, sanity was restored back in the pricing front and all, so it is -- in fact, things have improved in the last 1 year. And over a period of time, the competitive intensity is like this only, and there is no major change whatever.

[Operator]

[Operator Instructions]

The next question is from the line of Krishnan ASV from HDFC Securities.

[Krishnan ASV, analyst]

If you could just throw some light around this entire BCG exercise, more importantly, what percentage of your existing customer base according to your own analytics becomes eligible for this end-to-end digital journey in terms of being just pre-approved so that they can go through the pipe. I mean have you had some initial assessment around this? What is your assessment of where we are today? You said you had built INR 300 crores, INR 400 crores portfolio already. Just wanted to understand your early experience in this portfolio. And what's the kind of addressable market that you think within your own because it's meant for ATV, I was just trying to understand that, yes.

[N. V. Kamakodi, executive]

See the -- fundamentally speaking, like every one of my existing customers whose exposure is below INR 7.5 crores they have to go through the pipe in the future, even for the renewal. So these, like say, once they are entering into my system, after fulfilling their KYC and after, like say, giving their GST return or P&L, account statement, which is, once again, if they are existing customer, my own existing statements, based on -- and even if it is for new clients also, based on our policies and our track record, what is the, like say, quantum they will be eligible, the system will be throwing. So in other words, 100 percentage of my existing customers who are, like say, who have taken less than INR 7.5 crores, both existing and also new to the bank they have to necessarily go through this particular software only.

So the software, like say, makes multiple, like say, recommendations, whether they are eligible for credit, whether we can give, if we can -- if we decide to, like say, if we give credit, what is the risk rating, what is the, like say, range of pricing that should be, like say, like they should be eligible for this.

This is what the system looks into. This perhaps, like say, the earlier turnaround time, which used to take at least 2 to 3 months for taking a credit call, now if the customer gives the OTP and the documents in the required format, he will be getting a decision within 2 to 3 working days, if he gives everything, once the entry is done, in the same day, he will be in a position to release, at the best if one or two -- if it comes into the like say, Amber category where some manual deviations have to be taken, at the best in 2 to 3 days they will be getting a credit. This is -- they will be getting a decision. This is where things are at this point of time now.

One more thing on unsecured front, in a very small way, we are -- it's almost 0. It could be a, like say, potential product maybe 3 years down the line or 4 years down the line, we have just made a small beginning. We, like say, run analytics and took about, like say, 2,000 customers in that above we got a hit rate of about 10% and overall the book built through this scheme is hardly about INR 4 crores to INR 5 crores or whatever it is. And 2, 3 months, we are watching, and we don't have any delay in the repayment or whatever. So it has been started in a very small way, though it is, let's say, the amount is insignificant today. It will give us some experience to look into this maybe in the over the period of next 5 years to come.

[Krishnan ASV, analyst]

Understood. Understood. And purely on this unsecured piece, which is meant for retail unsecured. Just wanted to understand how -- so is that also meant predominantly for ETB customers who you have already been in banking with? Or does that book also expand into NTB.

[N. V. Kamakodi, executive]

No, it is currently only ETB customers who are having salary account with me. And we worked out based on their average balance, monthly credit, their CIBIL score and so many factors were taken into account, and we just took a small sample of 2,000, sent them messages that they are eligible for the preapproved credit, and the entire journey was digital, like say, do it yourself more.

So we wanted to just test whether it is working okay. So it worked okay. Once we crossed the 10% acceptance, we just closed that funnel, almost like say, 2, 3 repayments cycle is over. So far, all those accounts are, like say, without even any like say, DPD, days past due or whatever it is. So once we get a grip, like say, how to expand that to my other broader existing customers, we may be like -- but this particular segment, as we have explained in the past, this is not in our immediate priority. So our first priority is to, like say, go ahead with the MSME lending, then followed by the secured retail portfolio like housing loan and car loan. So that -- and this particular unsecured thing for existing customers, we have started. But this unsecured thing may, like say, for sure some amount of next level improvement over a period of time. Maybe in the next, like say, a period of 3 to 5 years, as explained.

[Krishnan ASV, analyst]

Got it. Just one last question. You mentioned about the first phase, which was around the INR 7.5 crore limit for the regulatory retail classification. How much of your existing to bank business would actually be eligible below the INR 7.5 crores?

[N. V. Kamakodi, executive]

See, we have about, say, INR 30,000 crores -- around INR 30,000 crores of MSME book. In that, let say, INR 30,000 crores, which was soaked about 75% because, you have another INR 10,000 cores, INR 12,000 crores of gold loan. Leaving the gold loan part and greater than INR 7.5 crores away, we should have at least about 60 to 70 percentage of our total loan book and about not less than 75 to 80 percentage of our non-gold loan book should be eligible to go through this digital progress.

[Operator]

[Operator Instructions]

Next question is from the line of Jai Mundhra from ICICI Securities.

[Jai Prakash Mundhra, analyst]

2 questions, sir, from my side. One is there was an RBI regulation that suggested that the banks now have to charge interest only from the period of disbursement and not from the date of sanction. Have we implemented, is there any impact in this quarter or maybe going into second quarter?

[N. V. Kamakodi, executive]

Yes. As far as this one we had been in compliance even before the arrival of that circular. This is basically happened particularly for the -- whenever, like say, predominantly for the retail lending, where like say, new to the bank where disbursement happened through the checks or whatever where there could be difference between the time of sanction and the time of, what you call, actual reduction from the money withdrawal from the bank account. But as far as we never had this particular issue right from the -- even before the arrival of the circular.

[Jai Prakash Mundhra, analyst]

Okay. That is very good to hear, sir. Secondly, sir, in terms of the new products that we were -- that we had started under the leadership of Mr. Vijay. If you can just update, sir, sorry if this question was repeated. I had joined the call a little bit later. If you can highlight the progress there. And by the end of the second quarter, should we start to see the book building up? Or how is the progress there?

[N. V. Kamakodi, executive]

Yes, we are in the process -- Mr. Vijay is here. He will be explaining how the progress is being made in terms of assembly of people and how the, like say, technology infrastructure and other things, Vijay will be explaining to you, yes.

[Vijay Anandh, executive]

We should be there by September as communicated in the last call. We are looking for a launch -- pilot launch by September. Our digital process is getting ready. Predominantly again, we are getting into classifications of basis risk score and one which can be immediately decisioned and one which should go to underwriter for decisioning. Our team is also joining. We expect the team to be here by August, September. The systems are also broadly in place. Hence, we should start our pilot disbursals by September last week, second week to third week. And full-fledged we expect this to happen in Q3 and Q4. This is what the broad progress on this and we intend to do loan against property, home loans, affordable and micro LAP.

[Jai Prakash Mundhra, analyst]

And Kamakodi, sir, so in that context, now we have delivered a 10% Y-o-Y advances growth in flattish Q-o-Q, which is better than last, let's say, 4, 5, 6 quarters on a Y-o-Y basis. I mean is it like fair to say that we would still -- we would now be double-digit growth trajectory. I mean, we'll not fall back to single-digit trajectory. And if there is anything you want to update here?

[N. V. Kamakodi, executive]

See, the -- this is what we are working hard for. And we wish you see that consistency as we move forward.

[Operator]

I will take the next question from the line of Punit from Macquarie.

[Punit Bahlani, analyst]

Just on the OpEx data our growth has been like not in line with the OpEx. OpEx has been sequentially. I understand you mentioned that the technological expenses have been high, but even the employee expenses have been high. I'm sorry if I missed this, could you comment why is that?

[N. V. Kamakodi, executive]

Yes. As I explained, like say, last time, we are taking some expenditure upfront, both in terms of technology and building the team. Like say, and it will take some time for that engine to give the business. So that's why our cost-to-income ratio also has shown some increase. So initially, there will be some drag in the profitability. Next financial year, we'll be breaking even. And it will be adding to profit kitty only beyond that. So that's where we are in this particular item. And one more item like say, the -- our annual increment cycle will start from the first of July. So there will be some, like say, increase in the, like say, salary expenditure sequentially -- so -- but overall, as I explained for the whole year, we had a cost-to-income ratio of about 47% in the -- for the year as a whole for financial year '24. In the last quarter, we had about 51% cost-to-income ratio. Overall, for the year, we should be having somewhere in between, and we had about 49-odd-percentage for the current quarter. This is how the expenditure part looks now.

[Punit Bahlani, analyst]

And secondly, on the unsecured loans, you just mentioned that the pilot process of LAP, home loans, micro LAP, affordable is going to start from September. Unsecured has already started, right? And what is the mix you target, I know FY '25 might be a short process, but by FY '26 to get to book mix of secured and secured. Currently, it's very small, but any guidance there?

[N. V. Kamakodi, executive]

Please understand the -- we are -- the first priority on retail will be only secured, so as explained, first priority is for having this, like say, housing loan, loan against the property and all, expansion of that portfolio is what Vijay Anandh explained which will start, like say, to show some light at the end of the tunnel after we start in the September month, Q3 and Q4, some amount of, like say, growth you will be seeing over there. But unsecured retail funding is only as a test case we have started. And it is not in our priority now.

We hardly have about INR 4 crores to INR 5 crores currently. We are trying to learn the -- like say, to ensure that the particular portfolio works, okay, what are all the things we need to learn and all. And it will be, like say, we will look into the suitability of that in our portfolio, maybe beyond the 3 years or maybe between 3 to 5 years, I think it will be -- it will not be -- we will not be expanding fast as we have done in the past.

Our focus will be more on the secured lending, so earlier, we focused -- we had always been on the, like say, MSME and secured lending for the creation of business assets. So some amount of extension we are doing into the loan against the property and housing loan like what do you call your secured retail lending and don't expect much for, like say, unsecured lending, it's only the proof-of-concept, and we are very long way from building that going forward, be very clear about it. Good that you asked that question.

[Operator]

The next question is from the line of Rahul Malani from Sharekhan BNP Paribas.

[Rahul Malani, analyst]

Yes. So my question is, your credit cost is very low for this quarter. Low for this quarter as compared to -- on a yearly basis. And this is adding to the overall profitability. So what do you think for a whole year FY '25 is this and, I think, the lower credit cost would sustain and carry on? And continuously, it will add up for the profitability for the whole year.

[N. V. Kamakodi, executive]

Our, like say, in fact, if you had looked into the, like say, 2, 3 -- last 2, 3 years, so last year, we had a slippage of about INR 1,000 crores and for the financial year 2023, we had about INR 1,300 crores. So effectively, the slippage came down from INR 1,300 crore to INR 1,000 crores. This year, we expect about -- maybe about INR 800 crores or something like that, maybe even slightly below that is what our calculations currently look, like say, demonstrate. The recovery numbers are almost INR 1,000 crores plus is the, like say, stable numbers, which we have started seeing about like say, INR 200 crores to INR 250 crores, like say, both live and technical rate of accounts put together is the run rate, which we are anticipating. So as explained in the previous quarters also, this year also, there has to be considerably, like say, reasonable credit cost moderation compared to last year.

[Operator]

The next question is from the line of Rajagopal Ramanathan from [indiscernible]

[Unknown Analyst]

I just have 1 question, sir. What is your long-term balance sheet growth aspiration and steady-state ROA? Because you have been a bank which has delivered reasonably good ROAs over a long period. You've seen a long cycle, you have gone through the ups and downs. So do you think over the next 5 or 10 years, you would be anticipating that your ROA should sort of stabilize between, say, 120 to 130 and your balance sheet growth aspirations would be anywhere between, say, 10% to 12% or max 15%.

[N. V. Kamakodi, executive]

See, the -- we -- as you explained, like say, up to financial year '19, we stabilized our ROA, we crossed 1.5 and started reaching about 1.6, 1.7, like say, levels also. We started planning for our next level of ROA expansion that is when the COVID came, bulk of our calculations, like say, were tested. We got back to 1 percentage, then we increased it 1.5 -- 1.35, 1.45 and 1.5, the pre-COVID level it almost demonstrated. We expect once we start seeing the, like say, delivery from the -- our productivity from the new growth engines, which we are trying to add definitely we -- there could be, like say, expansion in the ROA beyond 1.5, whatever we are there. And like say, in this cycle, like say, maybe for at least another, not less than, like say, 6 to 7 quarters or so, there is every possibility that current favorable credit cost environment may, like say, prolong. Maybe we'll be able to wait for the next cycle.

[Unknown Analyst]

And on the growth part of it.

[N. V. Kamakodi, executive]

It's -- if you had, like say, the data, in 15 years we increased our -- what about -- we demonstrated a growth at least about 2 to 3 percentage over and above the growth of the industry. And we could, in a small way, see the, what you call market share almost doubling from like say, 0.2 to 0.4 or something like that. Then there is post COVID there is, like say, a pushback, and we are still growing below the, what you call, industry level. So our long-term, like say, strategy over a period of decades, as you rightly said, we are a 120-year old institution, even though we are one of the bigger banks for a longer period of time and for the most of the cycles we have demonstrated ourselves as the bank with improved efficiency and profitability, metrics are closer to the top 10 percentage of the industry numbers.

So our aspirations are to get back to -- I mean, we are -- we don't, like say, believe in having extra natural growth much beyond the industry level growth and paying the price later. So we take, like say, a steady path, growing maybe a few percentage points over and above that of the industry growth rate is what we have demonstrated over a period of time, and it has proved good for us in terms of the long-term stability of the institution, which we think we will be, like say, following that path, proven path that we had seen in the past.

[Unknown Analyst]

Okay, which probably sort of, if I infer out of that, then where you are sitting with respect to capital adequacy at 21%. Technically, you don't require any capital for the balance sheet for another 5 years then? Because if we assume your balance sheet growth to be calibrated, I don't see any reason why you are likely to see a significant capital consumption. Would I be right in that assumption?

[N. V. Kamakodi, executive]

Yes. You might have seen our last major capital raising through QIP was 10 years back. We are not fortunately, like say, beyond year 2000 be it in the Y2K issue or after the 2008 global economic crisis or beyond that, like say, AQR because of the infrastructure lending and, like say, corporate lending, consortium lending and all, in every cycle, we, like say, survived without any problem. And even COVID cycle, we survived with a few bruises not much of issues and we had not brushed capital in the past. So that's our -- only thing is that like we have to improve our own return on equity. So matching if our return on equity and the growth rate, by and large, matches, we should not be, like say, requiring any additional capital or whatever. You may ask another question, in fact, you have -- I mean, our notice for the AGM is released today. In that, once again, we are asking for the, like say, QIP, but this asking for the permission of QIP is the permanent fixture of our AGM approval for the past 10 years.

We have not -- I mean we had that even more than 1.5 decades or so, we used it only once, but if at all any requirement comes in between maybe for any strategic reasons or any offer which we cannot refuse, we may have to, like say, the process itself may be time consuming and all. That's why after the arrival of, like say, QIP regulations by SEBI some 15 years back, every year in our AGM, we take, like say, approval from the shareholders. We use -- enabling -- it's purely an enabling resolution. We used it only once and only when it is absolutely necessary or absolutely when the offer is irresistible. So this particular -- asking for the shareholder approval had been a permanent fixture in our AGM for the past maybe more than 10 years or so.

[Unknown Analyst]

I appreciate the clarification on that. Actually, I was not worried about that because I knew that if you're saying that you're essentially going to be shoring up your ROE over the next couple of years then and with what your expectations are clearly, you're not going to be seeing capital consumption, and therefore, it's quite unlikely that you will further tank up your capital and push yourself into an overcapitalized zone. So if I'm permitted to ask just one question. So you said a possibility of a strategic opportunity. So would you be interested or -- well, I'm not putting words, but is it more from an expansion of the lending business, which means a potential opportunity on the NBFC front or on the tech front. What is the type of strategic opportunity that you might be interested in?

[N. V. Kamakodi, executive]

See, we don't have anything in hand and we don't know what is in store for us. I will just give you one, like say, answer which will be making you some sense. Say we were, like say, asking for the shareholders' approval, and we were -- I'm talking about pre-2014, which was the year when we went for the capital raising.

Before that, when I had a lot of, like say, pressures from the investor friends, or investment bankers and things like that, I made a claim that I will be going for, like say, QIP when I touch -- when I get an offer for 2x price to book. At that point of time, I thought 2 times the price to book was something which was unreachable because when I started, the price to book was 0.5.

So -- but -- and when I made our first preferential allotment to L&T, LIC, [indiscernible] Capital, Argonaut and all way back in 2008, it was at 1x price to book, which itself was about 25 percentage premium to then prevailing market price.

But suddenly, people were prepared to give premium and 2x price to book opportunity came, which made me, you don't know what type of opportunity may come, whether it will be good and all. I mean you are keeping all the options open.

I mean good that I'm not talking to any press person who will write, like say, headline tomorrow saying that something is there and all. I don't have any opportunity now. I don't know what opportunity in store for me.

It is a practice which we have been practicing over a period of more than a decade, and we have been using it extremely in judicious fashion, and only once we have used it.

So don't take any -- I mean, there is no reading in between the lines. It is just a continuation of our past practices, nothing else. It is purely, like say, continuing the, like say, practice which we have been doing over a time, over a period of 10 years or so, nothing more, nothing less.

[Operator]

[Operator Instructions]

The next question is from the line of Gaurav Jani from Prabhudas Lilladher.

[Gaurav Jani, analyst]

I joined a bit late. And congratulations on a good quarter. So just a couple of questions from me. One is on the yield, right? If the penal interest was not adjusted for the same, would yields have been similar to the last quarter?

[N. V. Kamakodi, executive]

As I explained, the NIM would have been 3.6%.

[Gaurav Jani, analyst]

Okay. Understood. But if you can just please clarify on the yields, would they have been stable or slightly lower?

[N. V. Kamakodi, executive]

It's -- I think sequentially speaking, the yield, we would have closed with 9.59%.

[Gaurav Jani, analyst]

You're correct. But if you...

[N. V. Kamakodi, executive]

Yes, if you add that back, it will be about 9.65%, 9.7% range.

[Gaurav Jani, analyst]

Understood. And sir, just a broader question, right? I mean, obviously, this -- the penal interest has impacted the entire sector, but otherwise, now interest income is now free of aberrations. I mean last few quarters, we've seen a lot of aberrations. So now it should be smooth, right?

[N. V. Kamakodi, executive]

Yes, hopefully.

[Gaurav Jani, analyst]

Okay. Understood. Sir, secondly, on the LCR, so 2 parts of the question. One is, you had mentioned last time there was some discussion with the RBI on the LCR definition. It was about 200% odd. So do we -- is that number revised? Or is it higher, that's the first part? And the second is your initial assessment of yesterday's LCR circular please.

[N. V. Kamakodi, executive]

See, the -- I mean, based on those things, I think this is the new, actually expecting this question. The -- what has basically happened is that you have now a draft circular particularly on the LCR calculations and all. So the -- which probably will make us to change some of the calculations or interpretations with which we had been calculating over a period of, like say, since the concept of LCR came about close to a decade back or whatever.

And because of these changes, there are -- I think the entire sector's LCR will converge around maybe 115 to 125 or 110 to 120 or such. You won't be having aberrations. I mean everybody will be now, like say, getting to this range. And there will be, like say, a requirement of, like say, redeployment or reorientation of the resources.

Even far as, we have some overseas deposits which we like say used to invest for maybe some -- few basis points extra interest and all, so we had to now get those things back from the overseas, like say, on maturity, we have to bring them back to our fold. Once we get them back and all, we will also be stabilizing around that number.

So basically, the noncallable deposits also, like say, we have in that -- we have about INR 2,900 crores, which we got that and all, which is getting eligible for this favorable calculation. So after some amount of, like say, aberrations, ups and downs, things should be stabilizing around 115 to 125 for all of us and for us also.

[Gaurav Jani, analyst]

After considering the impact of yesterday's circular, right, that's what you mean or without that.

[N. V. Kamakodi, executive]

Yes. Taking into consideration the latest circular.

[Gaurav Jani, analyst]

Just one small question, sir, extension of this, so do you expect because of this redeployment towards excess liquidity, do you see further margin pressure because of this or I mean, we're okay.

[N. V. Kamakodi, executive]

Nothing material. These sort of things are done on a treasury basis for 1 or 2 basis point arbitrage and things like that. Nothing material will be happening because of this reorientation.

[Gaurav Jani, analyst]

Sure. And sir, last question, please, if I can squeeze one. One is our cost of funds have peaked? Or you still expect further hikes?

[N. V. Kamakodi, executive]

It's almost peaked, but like say, and we expected the reduction in the interest rate cycle will start, but now enough indications are that they are not going to be as quick as it was expected. So by and large, it looks the cost side, it is almost peaked.

[Operator]

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

[N. V. Kamakodi, executive]

Thank you, all of you for joining this press conference, and thanks for AMBIT team to arrange for this. As explained this quarter for the first time, after 10 years, we have, like say, positive credit growth in the first quarter. But things are improving. And for the, like say, we have got back to double-digit growth after multiple months. Hopefully, this should be getting better and better from where we are. If you have any specific questions and all the contract numbers are given in the presentation. You have the contact numbers of Raguraman, like say, who is the contact person for the investor contact who's number and, like say, e-mail IDs are given. You may also contact any of our executives be it CFO or our GMs. Mr. Jayaraman or Mr. Ramesh or whoever it is, who will be in a position to explain you the numbers. I hope, like say, things get better and better from where we are going forward. Once again, thank you all for participating in this conference.

[Operator]

On behalf of AMBIT Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.