AU Small Finance Bank Ltd Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Bhavesh Kanani - ASK Investment Managers - Analyst : Thank you for taking my question. This one is on the disclosures on the 31st slide, provisioning summary. Base in the disclosure of net credit cost and excluding credit card -- credit cost, those numbers essentially imply that probably our credit card business annualized credit cost is around 6.5%. I wanted to verify that. And if that is the case, where do we see it stabilizing? Is 6%, 6.5% a level which is comfortable to us? And any directional outlook you want to give?

Question: Bhavesh Kanani - ASK Investment Managers - Analyst : Wonderful. Thanks, Mayank, for that. The second was on the industry level scenario on the term deposit and liquidity as well as deposit mobilization in general. If Sanjay, sir, could share his thoughts on these aspects?

Question: Bhavesh Kanani - ASK Investment Managers - Analyst : Just one clarification. When we talk about intensity of competition, do you see this cause hikes in term deposits in the industry?

Question: Bhavesh Kanani - ASK Investment Managers - Analyst : Wonderful, sir. All the best.

Question: Renish Bhuva - ICICI Securities Ltd - Analyst : Hi, sir. Sir, just two questions from my side. One, on the credit cost side. So now, since given we are scaling some of the new products like credit cards, which sort of impacted the overall credit cost in this quarter, and maybe post-merger, we have MFI book as well. Historically, we have seen that we've been able to sail through all the credit cycle with, let's say, average 80 to 90 basis points of credit cost. But now given we are entering new products with MFI coming in, what should be the normalized credit cost for AU going ahead?

Question: Renish Bhuva - ICICI Securities Ltd - Analyst : Got it. So just to get a sense, let's say, going ahead, given our focus is the way we want to build the deposit franchise. Credit card, of course, will be one of the key products in overall scheme of things. So naturally, let's say, that focus will continue on credit card, and with MFI coming in to meet the overall PSL requirement, we have to also grow the MFI book as well. So going ahead, your secured plus credit card plus MFI will be a new normal book for us. From that perspective, should we, let's say, assume 1%-plus credit cost for the entire AU business, or how internally you would like to look at it?

Question: Renish Bhuva - ICICI Securities Ltd - Analyst : Got it, sir. This is very helpful.

Question: Renish Bhuva - ICICI Securities Ltd - Analyst : Got it. Sir, just one clarification on the other interest income part. So when I look at the total securitized quantum for Q2 and Q3, it is broadly similar at around INR2,500 crores-plus. But when we look at the income portion, this quarter's income is significantly higher, INR180 crores-odd versus INR75 crores odd. So what am I missing here? Is there some NIM expansion significantly on the securitized book or how is it?

Question: Renish Bhuva - ICICI Securities Ltd - Analyst : Sorry, sir. I'm not hearing it very well.

Question: Renish Bhuva - ICICI Securities Ltd - Analyst : Yes.

Question: Renish Bhuva - ICICI Securities Ltd - Analyst : Okay. Got it.

Question: Renish Bhuva - ICICI Securities Ltd - Analyst : We'll sustain at around INR2,500 crores. So then this INR180 crores-odd other income will also sustain, right? I mean is that the right assumption?

Question: Renish Bhuva - ICICI Securities Ltd - Analyst : Got it, okay. Thank you and best of luck, sir.

Question: Kunal Shah - Citigroup - Analyst : Yeah. So the first question is on --

Question: Kunal Shah - Citigroup - Analyst : Yes. So I was just saying with respect to your entire strategy of deposit-led loan growth. So now, almost the deposit growth is 31%, but still we are growing at 20%, 21%-odd. And if we look at it right from March until December, in fact, the incremental CD ratio is 80%-odd. In fact, this quarter, the incremental CD ratio was hardly 50%-odd. So when do we see maybe like we are comfortable and now maybe we should resort out to a lesser amount of securitization because deposit growth has been quite strong, yeah?

Question: Kunal Shah - Citigroup - Analyst : Yes. Yeah, so not very completely on the deposit side. Absolutely, it's a great growth. The only thing was does it now provide a cushion in terms of securitizing relatively low compared to what we had seen over the past two, three quarters given that we are at 20% loan growth. Would we start following that --

Question: Kunal Shah - Citigroup - Analyst : Okay, perfect. And secondly, maybe the overall yields are still down 10-odd basis points. We have been talking about incremental yields. The mix shift is clearly happening on the AUM side, but still not entirely getting reflected, and we are saying that given the fixed rate, we should be positively poised. But somehow, I think this 38-bps incremental yield completely getting offset by the mix change plus 20 bps kind of a decline. So if we exclude this entire securitization income, would there have been the pressure on the margins to the extent of 30-odd basis points during the quarter? And then how comfortable we would be -- maybe you have lowered the guidance and said like we will be at the lower end of 5.5% for the full year, and we are at 5.6% for the first nine months. Does that suggest that we'll settle much lower getting into Q4?

Question: Kunal Shah - Citigroup - Analyst : Thanks, and all the best. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 25, 2024 / 12:00PM, AUFI.NS - Q3 2024 AU Small Finance Bank Ltd Earnings Call

Question: Bhavesh Kanani - ASK Investment Managers - Analyst : Yeah. Got it. Okay. Thanks, and all the best.

Question: Shubhranshu Mishra - PhillipCapital (India) Private Limited - Analyst : Hi. Thank you for the opportunity. So just looking at the credit card on slide 44, and just matching it up with the kind of credit cost that's been discussed on previous questions. This just seems out of whack 75% issuance new-to-bank customers, just like very high even on a global parameter, even the closest competition, which does new to bank would be around 50%, and the average limit per card is around [INR1.74 lakhs], which would be easily around 50% to 60% more than the industry average basis that the kind of credit cost that we are taking off around 5% or 6% looks absolutely benign. So what's the case here? We do not have a risk management team at all in credit cards? What are we doing here in credit cards, just look how absolutely outrageous?

Question: Shubhranshu Mishra - PhillipCapital (India) Private Limited - Analyst : Also, if you can speak about the cost of acquisition per card. That's all. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 25, 2024 / 12:00PM, AUFI.NS - Q3 2024 AU Small Finance Bank Ltd Earnings Call

Question: Shubhranshu Mishra - PhillipCapital (India) Private Limited - Analyst : See, what's the blended dollar value of ETB versus NTB? A blended number would be helpful.

Question: Shubhranshu Mishra - PhillipCapital (India) Private Limited - Analyst : This is ETB?

Question: Shubhranshu Mishra - PhillipCapital (India) Private Limited - Analyst : No, what is ETB and NTB blended cost?

Question: Shubhranshu Mishra - PhillipCapital (India) Private Limited - Analyst : Okay (inaudible) I'll probably come back in the queue. That's fine. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 25, 2024 / 12:00PM, AUFI.NS - Q3 2024 AU Small Finance Bank Ltd Earnings Call

Question: Manish Shukla - Axis Capital Limited - Analyst : Yeah, good evening, and thank you for the opportunity. Just sticking to card for once. If I look at the segmental yield, the differential between your home loan yield and credit card yield is only 40 basis points. Capital allocation -- I mean, capital requirement rather will be probably 3x. And yet on a YoY basis, if I compare both the books have ballpark grown about INR1,600 crores. I'm just thinking that from a return on capital perspective, how do you all thinking of card business? Where do you think you would need to take a call whether it makes sense or doesn't make sense, because at 12%, you probably will be on the lower side as far as credit card yields are concerned.

Question: Manish Shukla - Axis Capital Limited - Analyst : I'm sorry, but just to point there that, I mean, I appreciate the higher fees, but the credit cost delta as we are saying is also significant, and I'm sure OpEx delta is quite high. So I'm not sure if fees is negating the OpEx and credit cost delta between home loans and credit cards.

Question: Manish Shukla - Axis Capital Limited - Analyst : Sorry to harp here, Mayank, but during the tenure in which you are talking term book has gone up. Yield on the book has actually gone down at a time when interest rates are high. So even that math doesn't hold up, right? If you YoY yield, the yields are down on credit card book.

Question: Manish Shukla - Axis Capital Limited - Analyst : Will you be able to quantify that, please?

Question: Manish Shukla - Axis Capital Limited - Analyst : Sure, sir. One last question on cost to income, you suggested that FY25 might be similar to current levels. So on a standalone AU Bank, excluding the merger, when do the cost synergies start kicking in and we go to less than 60%?

Question: Manish Shukla - Axis Capital Limited - Analyst : Cost to income, your commentary suggested that FY25 cost to income will probably closer to where we are right now. When does this standalone bank cost to --

Question: Manish Shukla - Axis Capital Limited - Analyst : Sure, sir. I understood. Thank you for the opportunity.

Question: Param Subramanian - Nomura - Analyst : Yeah, hey. Thanks for the opportunity. First, my first question is on the interest income, on securitization. So if I understood it correctly, you have booked both last quarter's interest income from securitization as well as this quarter's, both in this quarter, right? That understanding is correct.

Question: Param Subramanian - Nomura - Analyst : Yes. So last quarter, it was not recognized. It pushed into Q3. And this quarter securitization has also been recognized in this quarter, right?

Question: Param Subramanian - Nomura - Analyst : Okay. Fair enough. And my second question is, again, coming back to the credit card portfolio. So if I understood correctly, sir, based on the disclosure you've made, the credit card provisioning in this quarter is about INR50 crores there or thereabouts?

Question: Param Subramanian - Nomura - Analyst : Prince, so that INR43 crores to INR45 crores is about INR180 crores annualized. If you go back to last year, the credit card book, the base of the credit card book was about INR1,000 crores last year. That suggests a pretty high credit cost on the credit card book. Of course, on a moving base that has grown like 2.5x over the last year, the credit cost looks lower. But if you look at it from a base adjusted book, it looks like it's 17%, 18%. So isn't that very high compared to that level? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 25, 2024 / 12:00PM, AUFI.NS - Q3 2024 AU Small Finance Bank Ltd Earnings Call

Question: Param Subramanian - Nomura - Analyst : Fair enough, Prince. But we've grown this book like 20% quarter on quarter. Are we still comfortable growing it at this pace? Or should we, as investors, be looking at a moderation in the pace going ahead at this pace, as you pointed out, the book is seasoning and the credit costs are catching up now?

Question: Param Subramanian - Nomura - Analyst : Yes, very clear, Prince. Thanks. So in a way, we should be looking at credit card as a sort of customer acquisition cost, if you will. That is my takeaway.

Question: Param Subramanian - Nomura - Analyst : Yeah. So but -- just quickly, in the past, you've highlighted that FY25, we should see breakeven of the credit card business. Now, in the light of, like the previous participants also mentioned that the yield is moderating and now we're seeing credit costs inch up. Do you want to revisit that or on the credit card business specifically? That's it for me.

Question: Param Subramanian - Nomura - Analyst : Perfect. Thanks a lot, sir. All the best.

Question: Madhuchanda Dey - MC Pro - Analyst : Hi, good evening. I have a slightly -- REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 25, 2024 / 12:00PM, AUFI.NS - Q3 2024 AU Small Finance Bank Ltd Earnings Call

Question: Madhuchanda Dey - MC Pro - Analyst : Yeah. Hello? Yeah. Am I audible now?

Question: Madhuchanda Dey - MC Pro - Analyst : Yeah, hi. My question is slightly long term. As you rightly alluded to the build-up phase of the bank, and we are in the seventh year. So given that there's a build-up phase, given that there's slight change in your strategy now in favor of the high-yielding book through the acquisition of the Small Finance Bank, which is predominantly into unsecured. Given this entire context, how should we look at ROA trajectory in the next three years for the bank? Hello?

Question: Madhuchanda Dey - MC Pro - Analyst : But you would have thought through this before embarking on this step, right? So if you could share some of those --

Question: Madhuchanda Dey - MC Pro - Analyst : Thank you very much and all the best.

Question: Bhavesh Kanani - ASK Investment Managers - Analyst : Sir, like I wanted to understand like the run rate, similar run rate do we -- can we expect for investments in credit cards and QR and video banking, whatever you have provided in the presentation now, like in terms of absolute number or like in terms of percentage, if you can give some color on that.

Question: Bhavesh Kanani - ASK Investment Managers - Analyst : Looking at quarter to quarter. I was looking at third quarter of FY24.

Question: Ashlesh Sonje - Kotak Securities - Analyst : Thank you, good evening. First question is on the investments towards digital initiatives. Within that expense towards credit cards, QR, and video banking that has gone up sharply, both YoY and QoQ, can you just qualitatively detail out, which are the main cost heads within this, not -- no numbers, but just what kind of costs go into this?

Question: Ashlesh Sonje - Kotak Securities - Analyst : I'm talking about that INR170 crores. That INR170 crores in this quarter, which went towards credit cards, QR, and video banking. What are the main expenses within this? What kind of costs does this include?

Question: Ashlesh Sonje - Kotak Securities - Analyst : Okay. So you'd say credit card acquisition would be a big charge within this?

Question: Ashlesh Sonje - Kotak Securities - Analyst : Understood.

Question: Ashlesh Sonje - Kotak Securities - Analyst : Understood. Okay. And secondly, can you just remind how we are accounting for the securitized book? Specifically, what part is recognized as interest income and interest expense? And what part is recognized as noninterest income, if any? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 25, 2024 / 12:00PM, AUFI.NS - Q3 2024 AU Small Finance Bank Ltd Earnings Call

Question: Ashlesh Sonje - Kotak Securities - Analyst : Okay. So there is no -- nothing which goes into noninterest income?

Question: Ashlesh Sonje - Kotak Securities - Analyst : Okay. Perfect.

Question: Ashlesh Sonje - Kotak Securities - Analyst : Understood, thank you.