Ladies and gentlemen, good day, and welcome to City Union Bank Q1 FY '24 Earnings 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, Aman. Good evening, everyone. On behalf of AMBIT Capital, I welcome you all to the first quarter earnings call of City Union Bank. From the management side, we have Dr. N. Kamakodi, MD and CEO; and Mr. J. Sadagopan, CFO. Without further ado, I'll hand over the call to Dr. Kamakodi for his opening remark, and post which we can open the floor for question and answer. Thank you, and over to you, sir.

Good evening, everyone. A hearty welcome to all of you for this conference call to discuss the unaudited financial results of City Union Bank for the first quarter ended June 30, 2023. The Board approved the results today, and I assume all of you have received the copies of the results and the presentation. You may have also seen the announcement of our Annual General Body meeting to be held on August 23, 2023, which will take place in virtual mode. On behalf of the Board and the bank, I invite all of you to participate in the AGM. During the Q4 financial year '23 con call, we had a detailed discussion about the headwinds in margin, base figures, and growth. Despite those challenges, we stated that we should be closing financial year '24 with a decent PAT growth, substantial reduction in net NPA, improved coverage ratio, and ROA close to our long-term average of 1.5. Our advances grew by 4% in Q1 '24 as compared to Q1 '23, standing at INR 42,405 crores. As mentioned in our earlier call, the first quarter will be quieter in terms of growth. We are targeting double-digit growth, or at least 12% to 15%, skewed towards the year-end. No major changes are expected in the composition of advances, as previously discussed. We have appointed Boston Consulting Group as our consultant to upgrade our existing digital lending processes. We expect that the benefits from this digitalized lending process will translate into growth in the second half of the financial year. Our deposits stood at INR 51,655 crores for Q1 '24 as compared to INR 48,772 crores for Q1 '23, registering a growth of 6%. Our net interest income grew by 15% in Q1 '24, increasing to INR 1,266 crores from INR 1,099 crores in Q1 '23. We witnessed subdued growth, especially compared to peer banks, particularly in retail, agriculture, and MSME segments. We are evaluating those prospects and processes. Until the last financial year, we considered recoveries made from slippages and upgradation in NPA accounts from the quarter ended to the date of approval of the accounts. Due to regulatory observations this quarter, we did not consider recoveries and upgradations occurred after the quarter ended. However, we did consider NPA accounts that closed between the quarter-end and the date of accrual accounts. The recoveries from slippages in Q1 financial year '24 amounted to INR 75 crores, and upgradations to the tune of INR 23 crores in live NPA accounts were not considered in the NPA collection from July 1 to the date of audit, which was customary in earlier times. Due to these changes in accounting, slippages for the current quarter are elevated at 3.6% on an annualized basis, with gross NPA at INR 2,081 crores and gross NPA ratio of 4.91%. Our net NPA stood at INR 1,039 crores with a ratio of 2.51%. Had we followed the old method, slippages would have been reduced by 70 basis points, resulting in a ratio of about 2.9%. The spike in slippages and NPA this quarter is expected to be a one-off occurrence, and we anticipate recovering to normal levels based on collections of approximately INR 98 crores, which will be incorporated in the second quarter. Regarding the provision coverage ratio, we stated that we would reach a 70% PCR with technical written-off and 50% PCR without technical written-off in the second half of the financial year. However, we achieved the target in this quarter, with PCR, including the technical written-off, standing at 70%. Our PCR without technical written-off stands at 74%. Mainly, we utilized extra provisions created for the Spicejet account, which was closed. We will strive to maintain this level in the future. Overall, SMA 2 numbers to total advances now stand at 2.45%. Our standard restructured assets have reduced to 2.69% of total advances as of June 30, 2023, from a peak level of 5.91% in September 2021. On the yield front, we have aligned with policy rates, and our yield on advances currently stands at 9.53% for this quarter, indicating a sequential increase compared to the previous two quarters. Similarly, the policy rate transmission has affected the cost of deposits, which presently stands at 5.36%, showing sequential growth. The net interest margin for this quarter is 3.67%, consistent with the last quarter. Our other income for Q1 '24 is INR 191 crores, compared to INR 218 crores in the corresponding period last year. The cost-to-income ratio for the first quarter is 41.98%, compared to 39.78% last year. Our expectation for the current financial year will be between 42% to 44%. Despite increased provisioning and elevated slippage, the profit this quarter is at INR 227 crores compared to INR 225 crores in the first quarter last year. Our ROA stood at 1.4% for the current quarter, showing sequential growth from the last quarter. The Board had a meeting today, forming a subcommittee for smooth succession planning. As you know, my current tenure will end on April 30, 2026. The committee is tasked with finding a successor and ensuring a smooth transfer of responsibilities when my tenure concludes, which will require an overlapping period between the successor and myself. During this time, my focus will be on accelerating digital lending implementation and strengthening the leadership team to make the organization future-ready. We are taking measured and appropriate steps towards growth, enhancing customer experiences through digitalized lending and improved underwriting methodologies. This may take a few quarters to show benefits in our top and bottom line. We are diligently working to achieve the financial year '24 double-digit advance growth between 12% to 14% and PAT growth. I remind you that last year, during the second quarter, we declared a profit of INR 275 crores due to various favorable conditions. For this year, there may be a sequential dip in profit, but it will be compensated in the second half due to expected slippage reduction and improved recovery for the year overall. We aim to achieve a four-digit profit figure for the current year, driven primarily by reducing slippage and improved recovery. With these opening remarks, I leave the floor open for discussion. Over to you.

The first question is from Rohan Mandora from Equirus Securities.

Sir, in the opening remarks, you mentioned that you will be looking at evaluating certain co-lending opportunities. Can you elaborate further on what kind of businesses and what kind of partnerships you're looking at?

We are in the early stages of discussions, particularly with a few NBFCs based in Tamil Nadu, focusing on vehicle loans and gold loans. We are primarily looking at co-lending opportunities in secured advances, especially in the gold loan, vehicle front, or housing loan areas.

When you're looking at gold loans, do the customer segments differ for these NBFCs?

Yes, the gold loan companies we are evaluating primarily source their business from outside Tamil Nadu, where we have a strong presence. However, I cannot disclose specific names at this point.

Regarding the digital lending that we are evaluating with the consultant, when do we intend to launch that, and what kind of customer profile will we target?

Initially, we will target our existing customer base to facilitate quicker approvals. It will first start with MSME lending under INR 5 crores. Following this, we will enhance our housing loan portfolio. The preparation for the software and scoring model is underway, and we anticipate it will be on track by the second half, improving our turnaround time significantly.

When recoveries were adjusted earlier, did the account need to be classified as 0 DPD or below 90 DPD?

Yes, to upgrade the account, it has to become 0 DPD.

Why was the tax rate lower this quarter?

The taxable income was INR 133 crores after accounting for provisions and write-offs. The tax incurred for this quarter is INR 33.50 crores, which we provided INR 40 crores for.

The taxable income was INR 133 crores after accounting for provisions and write-offs. The tax incurred for this quarter is INR 33.50 crores, which we provided INR 40 crores for.

We had extra provision related to the Spicejet account. Since that account is closed, we had to reverse that provision. Our slippages for financial year '22 and '23 hovered around INR 1,200 crores to INR 1,300 crores. This year, we expect the incremental slippage to be below INR 1,000.

Is there any specific reason for the substantial increase in provisioning compared to the previous quarter?

The extra provision for the Spicejet account was reversed and used to improve our provision coverage ratio. Currently, we wish to see our net NPA below 2%, closer to the pre-COVID level of around 1.75% to 1.8%.

On OpEx, staff expenditure has grown significantly. What growth do you anticipate for staff costs in FY '24?

Last year to this year's Q1, there has not been substantial growth in staff costs. We expect about a 10% to 12% increase in incremental salary due to growth in headcount.

Why is there a significant decline in credit volume this quarter compared to previous quarters?

A decline in cash credit utilization has influenced this. Typically, it hovers between 78% to 80%, but now it stands at around 70% to 72%. We have not ventured into many retail lending areas; thus, we need to explore these segments further.

Is there a short-term challenge in the MSME segment for the bank?

We are hoping for a double-digit growth of 12% to 14% in the loan book this year, with contributions from our existing MSME segment complemented by new lending segments through partnerships.

Can you provide a 3- to 5-year growth target for the bank's loan book?

Over the next five years, we expect our average growth rate to be around 15%. These newer loan portfolios, including co-lending and retail loans, will contribute about 12% to 15% of our overall loan book.

What caused the reduced MCLR despite rising funding costs?

This was a regulatory observation regarding our MCLR components. We had to align the margin accordingly.

You mentioned slippages would have been lower by 70 basis points with recoveries considered. Can you elaborate?

Normally, we account for recoveries, but due to regulatory changes, we need to follow updated practices. The INR 98 crores will be accounted in the next quarter.

What do you attribute the slow recovery rate in the technical written-off pool to?

Legal processes, along with operational complexities due to regulatory changes, have contributed to slow recoveries. Timeframes for recovery are typically 3 to 4 years.

Are you witnessing stress in the MSME segment that could impact future disbursements?

We are seeing improvements in approval rates as we refine our digitization, which should ultimately enhance our credit disbursements.

The next question is from Gaurav Jani from Prabhudas Lilladher.

Did you mention that your growth target is 12% to 14%?

Yes, we are still working toward achieving that target. BCG's consultation will digitize our processes and improve turnaround times significantly, enhancing our approval and conversion rates. The digitization process will streamline our existing business mix while enhancing our position in the market. Thank you all for attending this conference call. We are committed to enhancing our growth and customer experience. Should you have specific data points, Mr. Jayaraman's contact is available in the presentation.

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