Ladies and gentlemen, good day, and welcome to City Union Bank Q4 FY '24 Earnings Conference Call. Please note that this conference is being recorded. I now hand the conference over to Mr. Prabal Gandhi. Thank you, and over to you, sir.

Thank you, Sagar. Good evening, everyone, and thank you for joining the call. We have with us Dr. N. Kamakodi, Managing Director and Chief Executive Officer; Mr. R. Vijay, Executive President; and Mr. J. Sadagopan, Chief Financial Officer, to discuss fourth-quarter earnings of City Union Bank. Without taking much time, I'll hand over the dais to Dr. N. Kamakodi for his opening remarks, and then we can open the floor for Q&A. Thank you, and over to you, sir.

Good evening, everyone. Hearty welcome to all of you for this conference call to discuss the audited financial results of City Union Bank for the fourth quarter and year ended 31st March 2024. The Board approved the results today, and I'm sure you all have received the copies of the results and the presentation. I'm happy to announce that we have achieved two historical landmarks in this current financial year. We crossed INR 1 lakh crore of total business, and we also crossed INR 1,000 crores of PAT. The Board has recommended a dividend of 150 percent, including a 50 percent special dividend for our 120th year. Before getting into the financial results, I would like to inform you about the key changes in our Board and senior management position. Our non-executive part-time Chairman, Mr. M. Narayanan, retired from the Board on 3rd May 2024, having served in various capacities for 8 years. With effect from May 4, 2024, Shri G. Mahalingam, our Director, has taken charge as the Non-executive Chairman. Shri G. Mahalingam has over 3 decades of experience with RBI and a 5-year stint with SEBI as a whole-time member. He joined our Board as an independent director in July 2022. On senior management side, Shri. R. Vijay Anandh joined our bank as Executive President in March 2024, bringing more than 25 years of banking experience covering various sectors. The Board has recommended his appointment as a full-time director, which is under the consideration of RBI. About 10 executives in the rank of AGM and above have recently joined our bank to strengthen top management capabilities in retail, analytics, credit, and operations. In our Q4 2023 results call, we had expected some headwinds in margin and base figure growth but anticipated decent PAT growth, substantial reduction in net NPA, improved coverage ratio, and ROA close to our long-term average of 1.5 percent. Our performance for the financial year '24 is by and large as per the forecast we shared with you last year. During our Q3 call, we shared that we should achieve our first 4-digit PAT growth for the financial year '24. Our NPA slippages have decreased significantly, and live NPA recoveries have surpassed live slippages, indicating progress towards pre-COVID level slippages. Our digital lending process implementation is proceeding as scheduled, which will bolster credit growth in the upcoming quarters. We also confirmed that ROA is back to over 1.5 percent, and net interest margins remain stable. Overall, our Q4 performance aligns with expectations shared in previous calls, and we recorded a total PAT of INR 1,016 crores for the full year, an 8 percent growth compared to last year, with Q4 PAT at INR 255 crores, a 17 percent growth year-on-year. Our total business stood at INR 1,02,138 crores as of 31st March 2024, with deposits of INR 55,657 crores, registering 6 percent growth, and advances improved by 6 percent compared to the previous quarter. We previously discussed KCC loan degrowth affecting daily average advances, but we are seeing improved credit growth this last quarter, getting us back on track. The total slippage for FY '24 is INR 1,013 crores, down from INR 1,276 crores for FY '23. Meanwhile, recoveries totaled INR 1,031 crores, incorporating significant recoveries from live NPA accounts. As noted last call, live recoveries continue to surpass live slippages, aiding in reducing gross and net NPA numbers. The gross NPA declined to 3.99 percent as of 31st March 2024, a decrease from previous quarters. Our net NPA is down to 1.97 percent from last year's 2.95 percent, with a three-quarter decline trend. We've also significantly decreased net credit costs to 0.24 percent for FY '24, compared to 0.90 percent the previous year. Overall, SMA 2 numbers to total advances as of 31st March 2024, stand at 2.08 percent, including restructured accounts. Our insurance income contribution has doubled this year, reaching INR 55 crores compared to last year's INR 27 crores, with strong growth expected moving forward. ROA for FY '24 stands at 1.52 percent versus 1.46 percent last year, and our yield on advances increased to 9.83 percent for Q4 from 9.31 percent in the same quarter last year. The full year yield on advances is 9.72 percent compared to 9.23 percent in FY '23. Our net interest margin in the current quarter is 3.66 percent, and for the full financial year, it is 3.65 percent. Our cost-to-income ratio for Q4 FY '24 stands at 51.26 percent, while for FY '23-'24, it is 47.06 percent. We anticipate this ratio may elevate slightly as we invest in growth initiatives; however, the intent is to lower it as returns increase thereafter. We opened our 800th branch in Ayodhya and plan to establish 50 to 75 new branches in FY '25. Digital lending for MSME is nearing completion. On the asset quality front, we will continue to see reduced slippages and improved recovery. We expect growth visibility alongside our new digital initiatives and strengthened management team. As we move forward, improvement in net interest margin is anticipated, with stability expected around current levels. We will see the benefits of these digital processes in the coming quarters. To summarize, we believe we are on the right track with significant improvements across all parameters as we move ahead. I will now open the floor for questions.

The first question is from the line of Rajesh Mangal Agarwal. Sir, what is your projection estimation for gross NPA, net NPA, and ROA for financial year '24-'25?

Sir, what is your projection estimation for this gross NPA, net NPA and ROA for financial year '24-'25?

We expect, similar to the last three years of slippages, about INR 700 crores to INR 800 crores for the financial year '24-'25. For net NPA, we foresee a range between 1 to 1.25 percent by year-end, in line with our historical data.

Okay. And what about the ROA, sir?

We are working to enhance what we have accomplished so far to reach the next level.

The next question is from the line of Manish Shah from Investor.

I wanted to ask about the growth. What kind of growth are you seeing this year? In the last few quarters, you mentioned a return to growth of 12% to 15%. Now that you have expanded the workforce and incurred additional costs, when do you expect that growth to return?

See, we want to achieve the figure of 12% to 15% in financial year '24-'25 itself. Although things did not go as per our plan, we are putting our best efforts to attain more than what we promised. That is why I have refrained from giving any specific number for the current year. Upcoming quarters, we will start seeing improvement as we have established the sales vertical for core advances growth, which we did not do in the past. Additionally, we have initiated the digital lending process across various segments, which should enhance growth moving forward.

Sir, another question was about the other income and fee income. Sir, do you see that going up? And another thing was that how confident you were in the last con call compared to this con call about the loan growth, which you are talking? Are you more confident in this con call compared to the last con call?

Yes, definitely, the figures themselves would have spoken to you. Much of the growth for the current year occurred in the fourth quarter. The growth that has happened in Q4 is considerably more than in previous quarters, giving us confidence to push for increased future growth. Although Q1 may initially reflect a lull, we hope it won’t be as extreme as in previous years. For other income, I see significant growth potential, particularly from our improved insurance income from relationships we have built.

Compared to last year, can you see that this year, our profit will grow by at least by 10%, 15%, possible?

For that only, we are working hard.

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

I have a couple of questions. First on the cost-to-income ratio. It moved up from 48 percent to 51.2 percent sequentially. In your opening remarks, you mentioned this will remain elevated until benefits from investments flow through. Should we take the exit rate as the rate for FY '25, tapering down in FY '26?

You may consider two quarters to observe income from the new costs incurred. Some moderation in the second half should be visible. For the entire year, we expect to finish somewhere between the last quarter’s figures of 41 to 47 percent. So, once income starts coming from these investments, moderation should start to occur.

The first half will be around the exit rate while the second half may see improvements. So, net-net, you expect the overall year to be between 47% and 51%.

That is what we foresee, and we are making an effort to achieve this range.

With ROA at a steady state of 1.5% and the cost-to-income ratio higher this year, can we maintain ROA at this level driven by lower credit costs or other levers?

We aim to see improvement in ROA as we progress, despite higher cost-to-income ratios.

For FY '24, our ROA is 1.52%. Do you expect that for FY '25, it should only improve from here despite higher cost-to-income ratio?

This is what we are working towards.

Your ROA is back to a steady state level of 1.5%, but ROE is about 13 percent, which is lower than historical levels. How should we think about that going forward?

The lower ROE is largely due to the higher capital we are maintaining at this time. Once growth returns and ROA improves, ROE should naturally follow. We chose to conserve capital for future growth rather than pay excess dividends.

Given the stabilizing credit costs, will FY '25 be a year of consolidation rather than growth, and will growth and improvement in ROE be more of a FY '26 story?

Actually, the opposite is true. The years of 2022-'23 and 2023-'24 were primarily focused on consolidation and repairs, which are now nearing completion. We anticipate entering a growth phase in FY '25.

The next question is from the line of Mona Khetan from Dolat Capital.

Firstly, regarding the digital process, are all our MSME loans today up to INR 5 crores digitally dispersed within about 48 hours, or is that the goal?

Yes. We aim to expand this to INR 7.5 crores, the RBI limit for retail lending, with a goal of 48-hour disbursement.

Last year, our overall margins were 3.6%, significantly lower than historical margins. While I understand asset quality is normalizing, do you expect margins to hold at current levels?

Historically, our margins have expanded during rising interest rate cycles and declined when settling. We expect a stable interest rate this year.

Given competitive intensity, do you see overall yields settling at lower levels across cycles?

Our margin is generally around the long-term average of 3.4% to 3.7%. Recent margins are in line with historical averages.

How much of your gold book is via cash disbursal?

Cash disbursement is typically linked to savings accounts, allowing for immediate withdrawal through ATMs.

The next question is from the line of Rohan Mandora from Equirus Securities.

Can you clarify on digital initiatives regarding retail products? What segments are you targeting with the home loan and LAP products?

We estimate around INR 7,000 crores in housing loans from our existing customers. The focus will include existing depositors and then new customers through DSAs. This will target both salaried and self-employed individuals based on location.

Are we currently digitally underwriting for the SME, MSME segment?

Yes, we have completed API integration for digital underwriting, enhancing our efficiency.

What is the total investment quantum for technology linked expenses for FY '25 and '26?

We have consistently spent about INR 200 crores annually on technology investments, equating to about 20 percent of our PAT.

How does growth in Tamil Nadu compare to outside Tamil Nadu?

Growth is generally aligned between Tamil Nadu and outside the region.

What is the percentage of loans linked to EBLR as of 4Q?

Currently, 55% of our loans are linked to EBLR.

The next question is from the line of Sri Karthik Velamakanni from Investec.

Is the change in employee expenses this quarter reflecting new hires in top management, and is this the new run rate?

It includes recent adjustments in the dearness allowance as we transition to a CTC model, along with new employee additions.

The sequential credit growth appears better than recent quarters. Why is there hesitation in providing guidance this time compared to previously?

We refrained from guidance due to previous instances where our projections did not materialize.

What is the current LCR ratio for liquidity position?

We are maintaining a liquidity coverage ratio above 200%. It will be published shortly in our Pillar 3 disclosures.

The next question is from the line of Palak Shah from Elara Capital.

Deposit growth this quarter was 6% QoQ. What contributed to this growth, and how do we see deposit growth ahead? Also, the credit deposit ratio is at 81%. What is a comfortable level for CD ratio?

We have achieved substantial improvement in Q4. Normally, Q1 shows a lull, but we expect better performance compared to previous first quarters. However, I refrain from committing to an exact number until we observe clearer trends.

The next question is from the line of Rakesh Kumar from B&K Securities.

Good set of numbers with stable margins and decreased net figures. One question pertains to the recovery from technically written-off loans. Can you provide guidance on recovery pace for the next fiscal year?

Our recovery department focuses on total quantum of recovery, regardless of whether it is a written-off or live account. Overall recovery in the current year compares favorably with last year's performance, though predicting exact split between live and written-off recoveries is challenging.

Regarding MCLR progression from February '23 to November '23, how do we view the future MCLR increases and their impact on margins?

Ultimately, our yields on advances are converging, though we acknowledge previous shortcomings in rate transmission impacted margin trajectory.

To clarify, the EBLR and MCLR breakup stands at 55%, 45%. Correct?

Yes.

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

Has there been a reclassification in the loan book this quarter?

Yes, several reclassifications occurred based on changes in definitions, particularly regarding MSME classification after integrating digital lending processes.

I noticed that the current quarter reflects INR 500 crores acquisition of loans. Is this a new strategy?

It should be INR 500 million. It's just small deal attempts, not a significant shift in strategy.

Can you recap the management changes indicated earlier?

We are restructuring to align with the banking sector's growth focus. We’re enhancing skillsets in digital lending and retail banking and building a sales vertical. We've recently recruited 10 executives in various roles, however, one head of credit resigned for family reasons.

Mr. Vijay Anandh has now moved to the Board; can you confirm if another member will be joining the Board soon?

Yes, once Mr. Anandh receives RBI’s approval. Discussions for adding another whole-time Director are ongoing.

The next follow-up question is from the line of Rohan Mandora from Equirus Securities.

Could you clarify regarding Mr. Mahesh, who was the Head of Credit? He left the bank after only two months?

Yes, he relocated for family reasons and left prematurely.

How do the recent government notifications regarding 45-day payments to MSMEs impact credit demand?

We observe mixed impacts, with smaller entities reducing borrowings and larger industries increasing utilization to honor payments to MSMEs. It has led to an overall reduction in utilization.

Are there any regulatory changes affecting gold loan processing?

Not significantly. We have already adapted from previous audits ensuring compliance.

What will be our AFS reserve as of April 1 based on the new investment book guidance?

The difference in valuation was about INR 20 crores.

The next question is from the line of Rajesh Mangal Agarwal from Rajesh Mangal & Company.

In Slide #21, the CASA ratio seems to be 30%, which is significantly below the industry average. What is the reason, sir?

The trend has improved by about 7-8% over the last few years. While we strive to improve, maintaining around 30% has been our consistent model.

Do you aim to increase this CASA ratio above 30%?

While aspirations exist, results depend on the delicate balance of market conditions. We will aim for improvement, as we have in recent years.

The next question is from the line of Manish Shah, an individual investor.

After addressing non-performing assets, do you believe this is the year for consolidation in your technological and digital initiatives, leading to future growth?

Most consolidation efforts have been completed in the past two fiscal years. We expect to initiate growth as these digital processes stabilize.

Do you believe your fee and other income will considerably grow faster than previous years due to these digital initiatives?

While we expect some growth in insurance income, increased efficiency from digitization primarily enhances risk assessment and control costs. Therefore, substantial overall growth is not anticipated.

Could you elaborate on the substantial decline in other income from last quarter?

Our other income is made up of four components: core fee income, treasury profit, recoveries from written-off assets, and miscellaneous income. While insurance income improved, treasury income suffered due to the interest rate environment. Therefore, declines in both areas affected overall other income. However, our overall recovery remains robust.

In the first quarter, have you begun witnessing the benefits from your digital initiatives established over the past two to three years?

Yes, we have begun to observe improvements in inflows and sanctions, which are better than previous years. February and March have started reflecting these benefits.

The next question is from the line of Jai Mundhra from ICICI Securities.

Regarding loan growth and KCC gold loan impacts, has that portfolio fully depleted? Is there a new product to compensate?

Yes, that portfolio has run down completely, and we are seeing incremental growth in Agri and non-Agri gold loans.

Are you ready to introduce the new products, and which ones are you starting with?

We are focusing on secured retail products such as home loans, affordable home loans, and micro LAP, and we will start booking loans in Q2.

We will focus on retail secured products and eventually assess retail unsecured lending after setting the processes correctly.

When do you anticipate launching these products, and will there be a mix of branch and non-branch DSA-led products?

We aim to start booking from Q2 of the financial year, ensuring a combination of branch and DSA sourcing strategies.

Is there an internal milestone for the portfolio you wish to build from these new products?

It is premature to stipulate specific milestones at this moment.

Lastly, regarding OpEx, we saw 16%-17% growth this year. What is your outlook for OpEx growth in FY '25?

We are prioritizing a cost-to-income ratio between 47% and 51%. This includes dealings with expected quarterly fluctuations and our strategic focus for the year.

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

Can you elaborate on the senior level hires working alongside Mr. Anandh? What backgrounds do they come from?

The expertise gap from established traditional banks leads to recruitment from newer generation banks, ensuring cultural compatibility and expertise from regional states. This hiring strategy is structured to align with local market knowledge.

If you could provide examples of those new-gen banks you’re recruiting from?

For example, candidates from KVB and other prominent private sector banks are being approached to build our team.

While 3.65% margins have stabilized, how do we secure margins with an emphasis on retail secured products?

We must focus on an incremental asset mix, ensuring product-wise return and managing risk metrics effectively.

You refrained from offering guidance but can you at least confirm the assurance of double-digit growth for FY '25?

Yes, we are working towards obtaining double-digit growth as quickly as possible.

The next question is from the line of Prashant Kumar from Sunidhi Securities.

As you noted, cost to income will increase and stay between 47% to 51% this financial year. What changes are underlying this business model?

We have made investments in technology, manpower, and sales verticals that did not exist before. This is a necessary upfront cost for future returns.

Will FY '26 return to guidance around 43% to 45% range?

We will adhere to the cost-to-income ratio set for FY '25 at 47% to 51%.

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

Thank you all for joining us today. To sum up, we see many encouraging signs of improvement. Growth in Q4 is positive. Moving forward, we believe that our investments in sales verticals and technology will pay off. FY '24-'25 should reflect those advancements in our numbers as we progress. If you have any specific number-related queries, feel free to reach out to Mr. Jayaraman or Mr. Ragu as per the details given in the presentation. Thank you and have a good day.

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