Ladies and gentlemen, good day, and welcome to City Union Bank Q3 FY '24 Earnings Conference Call hosted by AMBIT Capital Private Limited. 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, Mr. Gandhi.

Thank you, Yousuf. On behalf of AMBIT Capital, I once again welcome you all for City Union's Third Quarter Call. On the management side, we have Dr. N. Kamakodi, MD and CEO; and Mr. J. Sadagopan, CFO. Without further ado, I hand over the call to Dr. Kamakodi for his opening remarks, post which we can open the floor for Q&A. 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 third quarter ended 31st December 2023. The Board approved the results today, and I assume you all have received the copies of the results and the presentation. During the past three conference calls, we had shared with you the following expectations for the financial year '23, '24. We are aiming at 12 to 15 percent growth for the year, with the growth skewed towards the year-end. We are working hard to achieve double-digit advance growth. We are also accelerating the implementation of the digital lending process initiated with the help of BCG, and we have already rolled out the first phase of the automated loan underwriting process. It may take a few quarters to show benefits in our bottom line. Despite headwinds in the margin, base figures, and growth, we expect to close the financial year '24 with decent PAT growth, a substantial reduction in NPA, improved coverage ratio, and ROA close to our long-term average of 1.5%. Our recoveries are more than the slippages, and we expect this trend to continue for the remaining quarters, bringing our slippages back to pre-COVID levels. We will strengthen the leadership team to make the organization future-ready with digital and retail initiatives to become the growth engine moving forward. By and large, we are progressing on these lines, except for growth, which we are just starting to see positive trends. With the implementation of the digital process, we have started observing improvements in a phased manner. While most of our peers are achieving mid-teens growth in advances aided by retail consumption lending and unsecured lending, we are not active in those areas. Post-pandemic, growth started stabilizing during mid-financial year '22. When we compare December '22 with December '21, we had a terminal advance growth of 12 percent, and daily average advance growth for the month was 14 percent. After regulatory observations on KCC agri loans in December '22, we had to stop new KCC loans, leading to a decrease from around INR 4,000 crores starting January 2023 to a balance of INR 229 crores as of 31st December 2023. During this same period, our non-agri gold loans grew by 28 percent or INR 1,200 crores. Our daily average advance growth started reducing from 12 to 14 percent in December '22 to 3 to 4 percent until September '23. We also initiated the digital lending process, and only now are we seeing stabilization. For the last two months, we are able to see around INR 400 crore monthly credit growth, which should translate into restoring our annualized growth to 12 to 14 percent going forward. Overall, all other factors have stabilized. Our recoveries in NPA are increasing beyond the slippages, resulting in a reduction in gross NPA, net NPA, and provision requirements. This trend has helped us observe decent PAT growth due to reduced credit card issues, despite headwinds in growth and operating profit. Our PAT has grown by 16 percent in Q3 FY '24, amounting to INR 253 crores compared to INR 218 crore in Q3 FY '23. The ROA for Q3 FY '24 was 1.49 percent compared to 1.34 percent in Q3 FY '23 and 1.52 percent for the nine months of FY '24, which aligns with our long-term average. The PAT for the nine months of FY '24 stands at INR 761 crores, and we anticipate crossing the INR 1,000 crore PAT figure for FY '24 for the first time. Our annualized slippage ratio for Q3 has come down to 1.7 percent in Q3 FY '24 from a peak of 5.56 percent in Q4 FY '20, which shows a sequential decrease closer to pre-COVID levels. The slippage for Q3 FY '24 is INR 187 crores while total recoveries made total INR 289 crores, comprising of INR 224 crores from live NPA accounts and INR 65 crores from technically written-off accounts. As mentioned in our last call, live recovery has surpassed live slippage this quarter as well, and we expect this trend to continue in the coming quarters. The gross NPA declined to 4.47 percent in Q3 FY '24 compared to 4.66 percent in Q2 FY '24 and 4.91 percent in Q1 FY '24, showing a sequential decrease. The net NPA fell to INR 941 crores as of 31st December 2023, resulting in a net NPA of 2.19 percent for Q3 FY '24, down from 2.67 percent in Q3 FY '23. The net NPA continues to decline this financial year with 2.51 percent in Q1 FY '24, 2.34 percent in Q2 FY '24, and 2.19 percent in Q3 FY '24. Our yield on advances for Q3 FY '24 was at 9.62 percent compared to 9.16 percent in the corresponding quarter last year. If we adjust for a one-time interest reversal of about INR 25 crores from non-performing FITL loans, the yield would have been 9.83 percent for Q3 FY '24. Our NIM for the current quarter is 3.5 percent, and for the nine months of FY '24, it stands at 3.63 percent. If we account for this one-off item, our net interest margin would have been 3.67 percent for Q3 FY '24 and 3.69 percent for the nine months FY '24. We opened 20 branches in this financial year, bringing our total branch count to 772. By the end of FY '24, we plan to open our 800th branch. We are currently in the advanced stages of strengthening the leadership team. The first set of senior team members are joining this month, contributing to our capabilities in digital lending, retail, and data analytics. Most of them will have joined before the next quarterly results, and we will provide further details in the next annual call. To summarize, we aim to achieve the 4-digit PAT for FY '24 for the first time. Our NPA slippages have reduced significantly, and live NPA recoveries continue to surpass live slippages. Hence, moving forward, we are on track to return to pre-COVID levels of NPAs. Our performance is largely in line with our previously shared numbers, barring growth, where we have seen positive trends recently, and we expect this to improve. The digital lending process is proceeding on schedule, which will help increase credit growth in the upcoming quarters. ROA has returned to 1.5 percent, which aligns with our long-term average. Our net interest margin remains stable. With these opening remarks, I now leave the forum open for questions. Thank you.

The first question is from Mona Khetan from Dolat Capital.

So my first question is on growth. If I understood correctly from your opening remarks, you're maintaining guidance for FY '24 at 12% to 14%.

No, I don't think we will be able to cross double digits. We are hopefully getting closer to the double digits.

Okay. Got that. And secondly, you mentioned the FITL impact, which hurt your yields in Q3. Could you elaborate a bit on what exactly happened here? How did that result in an interest reversal?

See, the FITL refers to the facility given to loans when restructuring was done during COVID. This INR 25 crores reversal comes from the interest income of those FITL given to borrowers, which is the portion of interest for those restructured loans that turned NPA. This INR 25 crores pertains to interest recognition on an accrual basis, and when an account becomes NPA, the FITL portion has to be reversed from interest income.

Got it. Because of some restructured book turning into NPA. Got it, sir. I'll come back in the queue.

The next question is from the line of Mohit Jain from Tara Capital Partners.

I have a further question on the growth guidance. You mentioned we will be somewhere near to double digits. This implies we have to achieve a growth rate of 8% to 9% in this quarter, which seems very optimistic considering the past three quarters presented negative growth or very low single-digit growth of 2% to 3%. What makes us optimistic about achieving that 9% or 8% growth? How has been progress in January to support this number?

You're right in your observation. In the past fourth quarters, we typically had about INR 2,200 crores to INR 2,400 crores, with a high of INR 2,768 crores in fourth quarter '21, '22. As you pointed one, it may sound optimistic, and I cannot assure everything. What I can definitively tell you is that two to three things happening now support us. One is that the unwinding of the KCC book on gold loans is mostly over, which should drive some growth back in that segment. The first phase of automated lending for loans under INR 3 crores has been mostly completed, which should also support growth. The challenges in growth are gradually being addressed. We strive to ensure that our NPA slippages and recovery are on track, which helps maintain profitability growth. In the last two months, average credit growth has returned to about 1% per month. The complete unwinding of the gold loan was not achieved over the last two quarters, and we're anticipating a firm upward tick as we move forward.

Sir, just one thing. In Q2, we had some guidance of double-digit growth, I think, 10% to 14%. In December, there were media articles suggesting growth might drop to very low single digits of 1% or 2%. The company clarified that we are sticking to the original guidance in mid-December. Could you elaborate on the overall guidance, sir?

Initially, we expected growth to be between 12% and 14%, before moderating to at least double digits. While some factors had negative impacts, we see positive movements now. We are trying to have everything under control before we can assure a firm number. Until we achieve steady growth, we're able to manage credit costs effectively.

Okay, sir. And what deposit growth are we targeting for the year?

We'll align our deposit growth with credit growth. We're not aggressively pursuing deposit growth and will address it once we stabilize.

The next question is from Franklin Moraes from Equentis Wealth Advisory.

Could you elaborate on this YOY growth? I was not very clear because at the start, you mentioned 12% to 15%, so does that still hold true?

To start with, I recollected our earlier conference calls. Initially, we expected a growth rate between 12% and 14%, and we thought it might reach double digits. However, now, we are not giving any expected number. We're putting forth our best effort to achieve growth approaching double digits. Currently, there is a gold loan degrowth that's near stabilization, and the first stage of our digital lending process has begun. We've seen credit growth increasing in the last couple of months.

How long will it take to return to the 12% to 15% guidance?

We'll provide an exact number once we have complete grip by the fourth quarter during the next conference call.

You guided for lower NPAs by March '24. Is that still accurate? Is there visibility beyond that?

As of now, we expect to benefit from not less than INR 200 crores in credit costs, considering lower slippages and improved recovery. We will see this trend visible for several more quarters.

So this improvement could last more than one quarter?

Yes, at least for 3 to 4 quarters.

The next question is from Rajkumar Vaidyanathan, an individual investor.

I have a couple of questions. The first question is on the recent floods in Tamil Nadu. What is the impact in the current quarter? Do you expect any stress in the upcoming quarter?

The impact was very insignificant. About 3 or 4 branches had operational issues for about 2 to 3 days. We do not expect any significant impact due to floods.

With bond yields softening, do we expect any uplift to the bottom line in the upcoming quarters?

You may see some profit booking activities due to increased yields, but it’s not clear how long this trend will last. We also face regulatory changes from April 2024 regarding profit booking rules.

Next question is from Arul Selvan, Independent Advisors Private Limited.

Could you elaborate on the changes made for digital lending? Could you provide us with more details on the project with BCG?

As I mentioned, we have completed the first phase for loans below INR 3 crores. The turnaround time can now be as short as one day for most of these loans, compared to weeks or months earlier. We are currently testing the next phase for loans from INR 3 crores to INR 5 crores. Assuming successful results, we can provide in-principle sanction within 48 hours. This will greatly improve the customer experience. Additionally, many parameters influencing default probability will now be captured through API integrations. This will enhance decision-making and reduce probabilities of default over time.

Would this impact quality of the underwriting team?

Yes, there will be multiple impacts. The quality of turnaround time will improve, and the overall quality of decision-making will enhance with better insights provided through automation.

What segments are currently prioritized for these digital processes?

Our key focus will initially be on MSME loans below INR 3 crores and subsequently expand to higher amounts and secured retail products. The goal is to streamline processes for products that are currently the mainstay of our book.

Next question is from Karthik from Pinpoint Asset Management.

Can you share insights on demand for credit in your core MSME segment?

We have started noticing increased requests, especially in the renewable energy sector, such as solar. There are improvements in capacity expansion requests within the usual MSME fronts. However, sluggishness persists in textile exports.

In the next 12 to 18 months, assuming successful implementations, what growth in loan demand do you foresee?

We are targeting a growth rate of around 16% to 17% to improve our return on equity and align our growth factors accordingly. Our focus will be on sustainable growth rates, leveraging our past performance to guide future expectations.

Next question is from Rajat Jain, an individual investor.

You mentioned that the cost-to-income ratio has been impacted by expenses related to BCG and digitization. How long will this last?

It will last for a maximum of a few more quarters.

Will automating the process aimed at loans up to INR 7.5 crores significantly increase processing capacity?

Yes, it will greatly enhance our ability to process proposals. We will still maintain a degree of manual oversight to ensure the quality of decision-making.

Regarding the decline of the KCC loan book, what adjustment in growth would we have seen without that factor?

If we had not adjusted for that, we would likely have seen a 5% additional growth in the calendar year '23.

The next question is from Kunal from Emkay Global.

You mentioned a one-off item impacting your NIM. Can you please elaborate?

Yes. This relates to the restructuring facility where funded interest term loans' interest is reversed when turned NPAs. This results in a one-off item of INR 25 crores that impacted our NIM.

Next question is from Chintan Shah from ICICI Securities.

For FY '25, can we assume a growth rate around 12% to 15%?

It appears positive now, but I cannot commit to a firm number until we have solid performance for another couple of quarters.

With our flat deposit growth and recent spikes in deposit costs, how do we ensure we achieve deposit growth on par with potential credit growth?

Historically, deposit growth and advance growth do not match consistently. We do not anticipate deposit growth to impede our ability to advance loans in the foreseeable future.

Given a potential decent growth for FY '25, will our margins not be a dampener?

We have consistently managed the movement of deposit costs and yields on advances, ensuring that it does not adversely impact our return on assets. Certain fluctuations may occur, but we do not expect any major impact that could hinder profitability.

Can you share details on provisions for the restructured portfolio of around INR 1,000 crores?

The average provision required should be around 10%, equating to roughly INR 100 crores.

Why have we made contingent provisions this quarter? Is this a response to specific issues?

It's a general measure depending on circumstances. We constantly assess our situation to take required steps.

The COD has increased sharply this quarter, right?

Yes, it's normal, and the yield has also seen a similar increase. Excluding any one-off items, margins have held steady.

Next question is from Neel Mehta from Investor Capital.

Post the divergence report from RBI last year, have there been any subsequent comments on the bank’s systems or business model during the annual audit?

The divergence we experienced was as of March 31, 2022, which is now resolved. The March 31, 2023 audit raised no requirements for disclosure, and we no longer have any pending issues.

Given that geographical and product concentration have been discussed by the RBI, have you received any feedback regarding diversifying your business mix?

We have not received specific feedback on that. All these matters are reviewed annually, and we continuously work on required corrective steps.

Next question is from Punit from Macquarie Research.

Can you provide an update on the digital transformation efforts you mentioned working with BCG?

Yes, we have completed the first phase for loans below INR 3 crores. The next phase for loans from INR 3 crores to INR 5 crores is already underway, with complete implementation expected by June.

Will the KCC book decline continue in the future?

We have not resumed that product and will only restart when full compliance is assured.

Next question is from Sagar from Anand Rathi.

Can you provide the SMA number?

SMA 2 is around 2.38 percent.

And SMA 1?

SMA 1 is 1.98 percent.

As there are no further questions, I will now hand the conference back to management for closing comments.

Thank you all for attending. Things are coming back on track, and we are on course to achieve a 4-digit profitability figure for the current year for the first time in our history. All issues that arose during or post COVID are progressively being resolved. Our growth efforts are comprehensive, and we are already noticing positive changes. Any further questions can be directed to Mr. Raghuraman or any other contact in our investor relations program. Thank you all for this opportunity.

Thank you very much. On behalf of AMBIT Capital Private Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.