Lionheart Holdings Q2 FY2023 Earnings Call

Ladies and gentlemen, good day, and welcome to the City Union Bank Q2 FY '23 Post-results Analyst Conference Call hosted by Ambit Capital. Please note that this conference is being recorded. I now hand the conference over to Mr. Prabal Gandhi from AMBIT Capital. Thank you, and over to you, sir.

Thank you. Good evening, everyone, and welcome back on Ambit Capital for City Union Bank's Second Quarter Earnings Call. We have with us N. Kamakodi, MD and CEO of City Union Bank, and his team. I will now hand over the call to Kamakodi for his opening remarks, post which we can open the floor for question and answer. Thank you, and over to you, sir.

Thank you, and good evening, everyone. Hearty welcome to all of you for this conference call to discuss the unaudited financial results of City Union Bank for the second quarter and half-year ended 30th September 2022. The Board approved the results today, and I hope all of you have received the copies of the results and the presentation. Our bank celebrated its 119th Foundation Day on 31st October 2022, which was just a few days ago. We are grateful to the immense service done by the founders, our past and present employees, and all our customers who have been with us for multiple generations. We also have an update on a change in management, particularly concerning the Board constitution. Srimati Abarna Bhaskar, our Independent Director, has retired from the Board of the Bank on 24th October 2022. She was inducted to the Board in October 2014 and served on almost all the committees of the Board. I take this opportunity to thank Madam Abarna Bhaskar on behalf of all of us for her valuable contribution. Today, we have inducted Srimati Lalitha Rameswaran to our Board effective today. She is a practicing chartered accountant and a qualified information Systems Auditor from the Institute of Chartered Accountants of India. She specializes in direct and indirect taxation, banking consultancy, and has experience in representing various financial institutions. On the performance front, the second quarter ended well on key parameters like growth, recovery of NPA, improvement of return on assets, and control of slippages, all aligning with our earlier expectations. As previously stated, we are optimistic about the environment improving further and are pushing for growth towards achieving over 15% growth by year-end. We shared expectations for financial year '23 during earlier calls. We target 15% to 18% credit growth for this financial year, with expected overall slippages between 2% to 2.5%. We anticipate slippages to decrease while recoveries improve, resulting in significant reductions in gross and net NPA by year-end. Our net interest margin should stay around 3.85% to 4%. We aim for a return on assets (ROA) level of 1.5% and foresee a cost-to-income ratio hovering between 42% to 45% without treasury income. Highlights for the second quarter and first half of financial year '23 include deposits growing by 8% to INR 49,878 crores year-on-year and advances seeing a 12% growth to INR 42,701 crores. Business grew by 10% and stood at INR 92,579 crores as of 30th September 2022. CASA recorded a 16% growth, surpassing overall deposit growth, reaching INR 15,609 crores and improving CASA percentage to deposits to 31% in Q2 FY '23 from 29% in Q2 FY '22. Net profit increased by 52% from INR 182 crores to INR 276 crores year-on-year. Return on assets improved to 1.72% in Q2 FY '23 against 1.32% in Q2 last year. For the half-year ended 30th September 2022, ROA stands at 1.59%. We have recorded a net interest margin of 4.02% for the half-year and 4.09% for the second quarter FY '23. Gross NPA stands at 4.36% and net NPA at 2.69% as of 30th September 2022. The credit growth is back on track, having grown by 12% in the last quarter. As mentioned in the last call, we have begun efforts to accelerate growth towards 15% to 18% for FY '23, with most of this likely coming in the fourth quarter. We have started actions in that direction with results expected by then. Additionally, we would like to provide updates on SpiceJet's status. The management has begun settling their dues on an agreed schedule, with INR 17.5 crores repaid and the outstanding limit currently at INR 82.5 crores. The slippage during Q2 FY '23 is INR 261 crores compared to INR 270 crores in the first quarter FY '23, marking a sequential decrease in the annualized slippage ratio to 2.44%. We recorded total recoveries and upgrades of INR 228 crores this quarter, consisting of INR 189 crores from live accounts and INR 39 crores from technically written-off accounts. The gap between slippage and recovery now stands at about INR 33 crores. The current SMA 2 (Special Mention Accounts) number is at 2.26%, which includes restructured accounts and regular accounts. The cost-to-income ratio for Q2 and H1 was 38.43% and 39.10%, respectively, compared to 40.51% and 40.56% last year. We expect some elevation in the cost-to-income ratio due to a lack of income from treasury, projected around 42% to 45% as discussed in our earlier calls. The capital adequacy ratio is currently at 20.08% for Q2 FY '23, a slight decrease from Q1 FY '23, primarily due to increased contributions from the non-gold loan portfolio. We have consistently maintained our capital without any dilution in the last eight years, with the last funds raised via QIP in July 2014 for INR 350 crores. Even during COVID, we managed without requiring fresh capital infusion. We believe the credit growth will stabilize around the pre-COVID levels of 2% to 2.5% slippages, which we have shared before. Both slippages and recoveries should balance each other out to result in significant reductions in gross NPA and net NPA, especially toward the end of the year. I have to emphasize again that our ROA is now exceeding our initial expectations, and we are seeing consistent improvement in all parameters. We have improved our digital capabilities and are working on partnerships with FinTechs to enhance services. I assure you that we will continue to maintain a focus on technological advancement to remain competitive.

Our first question is from the line of Suresh Ganapathy from Macquarie.

I had two questions, Dr. Kamakodi. One is on the ROA itself, right. So you have ended Q2 with 1.72% kind of an ROA now. Historically, you've always said that sustainable ROA should be 1.5%. Do we assume that because we are going through a fantastic credit cycle, you can push up the envelope and move to a 1.7% kind of an ROA sustainably? That's the first question. The second question is regarding deposit growth, which has been weak at 8% year-on-year. Now if you want to push your loan growth to 15% to 18%, you have to get your deposit growth up. 8% is not sufficient at all. What are you doing on the deposit front, and is that not a worry? Over to you, sir.

I will answer the second question first. As I have mentioned, I have sufficient surplus funds even now to achieve that 15% to 18% growth for the remaining part of the year. That's why we were slow in increasing our term deposit rates. I do not need to push it beyond that, and I have adequate liquidity to manage year-end figures. This answer connects with your first question regarding the ROA. If I push it more, I'll end up with surplus funds again, needing to invest in government securities, leading to negative carry in an increasing interest rate scenario. Therefore, we're carefully managing these aspects. I believe we can sustain ROA levels beyond 1.6% and 1.7%. However, uncertainties remain, as external macro conditions can always impact our decisions. We aim to maintain consistency as our top priority.

And what is your LCR this quarter? And what was it in the earlier quarter? Can you just add that number?

Yes, it is over 200%.

The next question is from the line of Renish Hareshbhai Bhuva from ICICI Securities.

Congrats on a great set of numbers, just two questions, one on the PCR...

Sir, can you come closer to the microphone, please? I'm unable to hear you clearly.

Why are we using this strong operating performance to provide below-par PCR? Of course, I understand that our entire book is a secured book, but when we look at our peers who are also in the secured book business, those guys maintain a PCR of around 50% to 60%. Why aren't we maintaining that level?

As we have repeatedly mentioned, we monitor the provision coverage ratio according to regulatory guidelines, considering the technically written-off portion as well. Our coverage ratio is around 60% to 65%, similar to most of our peers. Additionally, our confidence in the visibility for the next few quarters suggests we can achieve significant improvements.

And sir, last question is a bit strategic. We have a strong relationship with our customers. When do we expect our bank to become a primary bank for their entire family banking needs? Currently, we may be catering to business owners, but how can we attract their families to become primary banking clients?

As previously mentioned, the gap in fee income from third-party distribution is less significant than perceived. We are looking into a few missing products, such as credit cards and home loans, to enhance our offering. Our CASA ratio has improved significantly, which gives us leverage to introduce more products without compromising ROA. We expect to make progress in this area over the next 4 to 6 quarters.

This is helpful, so we are focusing on that front.

Let’s be cautious in our optimism regarding the situation.

Our next question is from the line of Darpin Shah from Haitong India.

Can you provide some color on the restructured book? Last quarter, you mentioned 58% has started repayments. Can you clarify the current situation?

Out of INR 1,963 crores in the restructured category, about 62% of the book, roughly INR 1,228 crores, has already started repayment. INR 736 crores has yet to start. Overall, 87% have started paying EMIs, though only 62% have begun their scheduled repayments.

What is the current status of ECLGS? Can you share some data there?

The ECLGS contribution to SMA 1 and SMA 2 is just 1.5%. Our overall SMA 2 from this portion is only INR 324 crores.

On the operating expenses, the other expenses have dipped significantly on a sequential basis. Can you provide some context on this?

Operating expenses saw a reduction due to better yield management and a decrease in actuarial valuations on leave encashment. This resulted in a small benefit this quarter, which looks favorable.

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

Congrats on the quarter. Can you elaborate on the competitive landscape, especially in Tamil Nadu? Has competition reduced since COVID?

Competition is constant. As I mentioned earlier, banking has always been competitive since liberalization. I consider that while giving my expectations for growth, and I've factored in competition in our projections.

You have expressed confidence in achieving 15% to 18% growth. What related factors contribute to this confidence?

Initially, we expected a macro shock due to high oil prices owing to the war, leading to increased uncertainties. However, we found that things were not as negative as anticipated during the first quarter. Such clarity gives us confidence in pursuing growth. As we continue to change our approach for growth, we hope to see significant improvements in performance.

What internal changes are you focusing on?

Previously, my field staff were instructed to tread carefully due to elevated risks. I have begun changing our approach to prioritize growth.

Any insights on cash flows for SMEs?

Cash flows appear to be in a good state across most sectors.

Lastly, how much is the excess SLR or excess investments on the balance sheet, in absolute amount?

We see potential for an increase in our loan book by about INR 3,000 crores to INR 3,500 crores, which should be manageable with our existing surplus liquidity.

Our next question is from the line of M.B. Mahesh from Kotak Securities.

I have the same question regarding recovery and upgrades. How are things shaping on the ground?

We rely minimally on exports, focusing on domestic markets. Our exposure to exports accounts for less than 2% of our total portfolio, and companies have been able to meet local demand satisfactorily.

I have questions regarding yield and cost of deposits. You have seen a 35 basis points increase in lending yields. How far do you think this can go?

I can provide direction; however, I cannot give exact figures. Typically, deposit repricing occurs over 3 to 3.5 quarters.

This is on the loan side, correct?

Yes, this is about lending yields. The gap is currently about 30 to 40 basis points.

If I can quantify deposit exposures to EBLR, MCLR, etc.?

Currently, 68% is under EBLR and 25% under MCLR.

Can you clarify the sanctions authority in MSME and trader segments?

Branch managers have zero authority. All credit decisions are centralized, which has been our policy for nearly ten years. They can only sanction certain loans within specified limits.

It appears the bank is losing market share despite improved quarterly growth. Is this trend consistent across India, or mostly outside Tamil Nadu?

Market share is a secondary priority. Post-COVID, we focused on gold loans instead of core advances. We continued our path to growth and believe we will rightfully regain our core market share soon.

Regarding non-staff costs, why did they decline significantly quarter-on-quarter?

This could relate to timing variations in expenses such as repairs and maintenance that may not happen quarterly but are booked when incurred.

So to clarify, RBI has raised rates by 190 basis points. Have you passed on approximately 150 to 160 basis points?

On average, we've passed on a total of about 70 to 80 basis points thus far; actual raises will vary across segments. Resetting EBLR loans happens every quarter.

Congrats on a good set of numbers.

Thank you. If there are no further questions, you may proceed.

Thank you, Kamakodi, sir. Any closing remarks?

I express my gratitude to everyone participating in this call. Overall, we are seeing positive trends as previously shared regarding growth and ROA. Despite potential macro uncertainties, we feel optimistic moving forward. Thank you again.

Thank you, sir, and thanks everyone. Have a nice weekend. Bye.

Thank you very much. That concludes this conference call. Thank you for joining us, and you may now disconnect your lines.