Earnings Call Transcript - CUB Q4 2023

Operator, Operator

Ladies and gentlemen, good day, and welcome to the Q4 and FY '23 Earnings Conference Call of City Union Bank 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.

Prabal Gandhi, Host

Thank you, Yashasvi. Hi, good evening, everyone. Thank you for dialing in. On behalf of AMBIT Capital, I welcome you all to the fourth quarter earnings call of City Union Bank. We have with us Mr. N. Kamakodi, MD and CEO; and Mr. J. Sadagopan, CFO. Without further ado, I'll hand over the call to N. Kamakodi for his opening remarks, post which we'll open the floor for Q&A. Thank you, and over to you, sir.

N. V. Kamakodi, MD & CEO

Good evening, everyone. Heartily welcome to all of you for this conference call to discuss audited financial results of City Union Bank for the fourth quarter and year ended 31st March 2023. The Board approved the results today, and I assume you all have received the copies of the results and the presentation. You might have also seen the announcement of a 3-year extension approved for our MD and CEO. The succession planning will start maybe about 2 to 2.5 years from now. At the beginning of last year, during the fourth quarter financial year '22 conference call, we shared with you our expectations that growth would be low to middle double-digit, and we did not have visibility for brighter growth because of our higher pricing, macroeconomic stability, and other factors. Although we were not bullish at the beginning of the last financial year, the outlook improved during the middle of the year, but unexpected developments affected our progress. Thankfully, those challenges are behind us now. Financial year '23 has been a decent year for progress despite the challenges we faced. Most parameters, such as PAT growth, reduction in NPAs, and ROA growth, had broadly been in line with our annual goals, even though growth has been below the expected level. As you all know, we had tightened the underwriting process even before COVID, when our approval rate for new customer log-ins dropped from around 45-50% to around 25%. We did not change the composition of the advances. The major segments are MSME, which holds a 43% share, and gold loans, which currently represent about 25% of our advances. Historically, we did not focus much on segments like housing, credit card, vehicle loans, personal loans, and loan against property, among others. We are in the process of finalizing a partnership with the Boston Consulting Group as our consultant to upgrade our existing digital lending processes, which should enhance our approval rates in the upcoming quarters. We are aiming for about 12% to 15% growth for the current year, skewed toward the year-end. No major changes are expected in the composition of advances. As discussed in the last quarter call, we could not recognize the interest subvention part of our Agriculture KCC Jewel Loan. We have completed the necessary compliance for the scale of finance, as discussed last time, along with the required audit process. Post-call, we received one installment of payment and are waiting for the rest. This is a good sign as receiving the first installment was crucial. At the beginning of the year, we estimated the slippage for financial year '23 to be in the range of 2.5% to 3% of the closing advances. Besides the accounts marked as NPA by our system automation, we have recognized additional accounts as NPAs in Q4 '23 that are showing signs of sickness, even though they haven’t crossed the 90-day norm. The outstanding has not exceeded the 90-day norm, but based on our experience, we have proactively acted on these accounts. Considering all these factors, our slippage for financial year '23 was at 3.02%, which is 2 basis points higher than our expected range. Our gross NPA stood at INR 1920 crores as of 31st March 2023, with a gross NPA ratio of 4.37%, down from 4.70% last year. We expect a good moderation in slippage this year. Simultaneously, recovery has improved substantially during financial year '22 and '23. We had total recovery and upgrade of INR 1007 crores in financial year '23, comprising INR 813 crores from live accounts and INR 294 crores from technically written-off accounts. This compares favorably to INR 795 crores last year, comprising INR 607 crores from live accounts and INR 188 crores from technically written-off accounts in financial year '22. The addition to NPAs from recovery for financial year '23 improved to INR 222 crores from INR 481 crores in financial year '22, demonstrating an addition benefit of about INR 260 crores in the current year. Net NPA improved sequentially from 2.67% in Q3 to 2.36% in Q4, and we expect substantial recovery improvements in the current year to return net NPA to pre-COVID levels within the next few quarters. In this process, we also expect our coverage ratio to improve, targeting over 20% with technical write-offs and over 50% without technical write-offs in the coming quarters. The overall SMA 2 to total advances now stands at 1.82%, reduced from around 6% during pre-COVID levels. Our standard restructured assets have also decreased to 2.83% of total advances from a peak of 5.91% during September 2021. We also have tied up with six insurance companies covered in life, general, and non-life segments, which are beginning to show results. During financial year 2019-20, our bank's insurance commission was INR 9 crores, which has improved to INR 27 crores, showing a growth of 3x over the last four years. We expect this growth to continue in the coming years. Additionally, the cost of deposit increases and the non-recognition of interest subvention amounts have reduced our net interest margin slightly. Our net interest margin for the quarter ended at 3.65%, while the annual margin for the year was 3.89%. We expect pressure on the net interest margin due to deposit repricing in the industry. However, our cost-to-income ratio for financial year '23 has reduced to 38.85% compared to 40.37% in financial year '22. In the absence of treasury profit, the cost-to-income ratio may elevate slightly to around 40% to 42% for the next financial year. During the mid-financial year '21, at the peak of COVID, we anticipated returning to a pre-COVID ROA of 1.50% by the second half of financial year '23. In the first half, we achieved a PAT of INR 500 crores and ROA of 1.59%. We expected the same in the second half as well; however, several unexpected contributions led to a reduction in this figure, including treasury profit and write-backs from NCLT accounts. These opportunities are now unavailable. We concluded financial year '23 with ROA of 1.46%, which is close to our long-term average of 1.50%. We hope to close financial year '24 also with ROA of 1.5% or more, supported by NPA recovery, though we will face challenges in PAT growth during the first half, balanced by compensation in the second half due to business growth and improved NPA recovery. Overall, we have good visibility and confidence regarding achieving PAT growth and ROA in the current year. Our PAT has registered 23% growth, standing at INR 937 crores for financial year '23 compared to INR 760 crores for financial year '22. This year, we also expect growth in proportion to the advances, targeting 12% to 15% annual profit growth consistent with business growth and improved recovery. In summary, despite headwinds in the margins and the reduction in non-interest income opportunities, we expect to close financial year '24 with decent PAT growth, substantial reduction in NPA, improved coverage ratio, and ROA close to or better than our long-term average of 1.5%. Some unexpected issues impacted the last year, but those issues are now behind us. With these opening remarks, I open the forum for questions. Over to you all.

Operator, Operator

We have a first question from Mona Khetan at Dolat Capital. Please go ahead.

Mona Khetan, Analyst

So just taking up from your opening remarks, you mentioned that there is an increased focus towards retail but also mentioned that the loan mix is unlikely to change in FY '24. Is that correct?

N. V. Kamakodi, MD & CEO

No, I did not say that I will concentrate on retail. What I'm trying to say is that many of our peers have shown greater interest and growth in retail, but we may consider it for fiscal 2024-25 and onwards. Currently, we don't expect any major change in our overall loan mix.

Mona Khetan, Analyst

Got it. And regarding margin trajectory, in H1 of next fiscal, do we believe that 3.85% to 4% is attainable? Or would they be relatively muted?

N. V. Kamakodi, MD & CEO

Yes, we will see margins maybe around 10 to 15 basis points lower than that, given the fourth quarter average of 3.65%. Our margins will be around this range for the current year because, on one hand, interest rate hikes have been passed on during the fourth quarter and there will also be some repricing impact on the cost of deposits.

Mona Khetan, Analyst

Okay. So full-year margins will be closer to what we saw in Q4 of FY '23?

N. V. Kamakodi, MD & CEO

Yes, plus or minus 10 basis points.

Mona Khetan, Analyst

Just finally, regarding FY '24, I understand we are moving to a CTC-based salary structure for employees.

N. V. Kamakodi, MD & CEO

This year’s increment will be the last of the time-scale based increments. The actual impact of the CTC basis will only be visible next year.

Mona Khetan, Analyst

Okay. Is that why you're expecting the cost ratio to be higher this fiscal or just because of the lower top line?

N. V. Kamakodi, MD & CEO

No. Last year, in the first half, we had good profits from treasury and lumpy recoveries from NCLT accounts, contributing significantly to our other income. We won't have such opportunities this time. We do expect an improvement in slippage minus recovery, which will help us compensate for some of the impacts.

Operator, Operator

We have our next question from the line of Rohan Mandora from Equirus Securities.

Rohan Mandora, Analyst

When you're guiding for a NIM of around 3.65% as 10 basis points for FY '24 and an ROE, which in Q4 was around 1.3% ROA, we are guiding for a 1.5% kind of an ROA for FY '24. So what will drive the ROA improvement, considering the expectations for FY '24's added profitability?

N. V. Kamakodi, MD & CEO

The major driver will be improved recovery. We weren't able to achieve this previously, but we expect it to improve like we demonstrated a significant difference in addition minus recovery from last year. We believe this will provide us comfort to maintain our overall ROA and PAT growth.

Rohan Mandora, Analyst

What would be the expected credit cost that we are forecasting for FY '24?

N. V. Kamakodi, MD & CEO

The provision made net of recoveries in technical write-offs comes to about 90 basis points for financial year '23. We had seen lower numbers in previous financial years, but we expect a similar jump in current year as well.

Rohan Mandora, Analyst

So this relates to net slippages specifically?

N. V. Kamakodi, MD & CEO

Correct. The SMA 2 numbers have reduced substantially, and our restructured standard assets have also come down significantly.

Rohan Mandora, Analyst

For FY '24, when you talk about targeting 12% to 15% growth, is there any specific focus on new products or geographical expansion, or will the growth primarily come from the same segments?

N. V. Kamakodi, MD & CEO

The current growth rate will likely continue in the first half. We carefully reviewed our processes over the past years to enhance our growth. We anticipate improved growth rates in the second half as these changes take effect.

Rohan Mandora, Analyst

Is the low approval rate of 25% due to market-quality proposals or a more conservative process on the bank's part?

N. V. Kamakodi, MD & CEO

The lower approval rate is not due to competitive intensity or a lack of proposals. We had to tighten our processes to ensure we only take proposals that we are comfortable with. The process is in the works, and we will open up more as we refine our digital processes.

Unknown Analyst, Analyst

Taking this forward, was the growth we saw a function of increased competition in the ecosystem? How have you assessed the MSME sector's health in relation to what we can expect over the coming quarters?

N. V. Kamakodi, MD & CEO

Our analysis indicates that the health of MSME is currently good. The issues that existed have largely been addressed. We expect to see both recovery improvements and lower slippage in the coming year.

Rohan Mandora, Analyst

Can you clarify about credit costs for FY '24?

N. V. Kamakodi, MD & CEO

As mentioned, we don't want to provide specific numbers. It will all depend on the net NPA by the end of the financial year. There’s a broader picture we can discuss. We expect to see an improvement in the portfolio recovery and other factors to help maintain the a PAT growth and lower NPA position as we had hoped for financial year '24.

Operator, Operator

We have our next question from the line of Prakhar Agarwal from Elara Capital.

Unknown Analyst, Analyst

Can you elaborate on how your processes have changed based on past lessons, especially surrounding the regulatory issues and divergences?

N. V. Kamakodi, MD & CEO

We cannot guarantee that unforeseen issues will not arise, but we have learned from past divergences. With rigorous processes in place, we aim to ensure that we're positioned correctly relative to market expectations.

Amish Thakkar, Analyst

What are some key actions you’ve implemented to handle regulatory concerns better?

N. V. Kamakodi, MD & CEO

The primary focus is to ensure comprehensive compliance in our processes to avoid future issues, while simultaneously pushing for growth in a manner that safeguards our reputation.

Operator, Operator

We have our next question from the line of Rakesh Kumar from B&K Securities.

Rakesh Kumar, Analyst

Looking at the credit growth, can you give insight into how your current products and mainstream sectors perform relative to expectations?

N. V. Kamakodi, MD & CEO

We need to carefully consider the segments we are targeting based on both opportunity and risk profile. Our primary focus is on stability and risk management as we push for growth as well. We expect the sustainable trajectory in sectors reflects a mix of opportunities and risk adjusts growth. The credit cost guidance remains reflective of our assessments along with the expected recovery dynamics, though we remain cautious given market factors.

Operator, Operator

Ladies and gentlemen, that was the last question for today. I now hand the conference over to management for closing comments. Over to you, sir.

N. V. Kamakodi, MD & CEO

Thank you all for attending. Despite the challenges that presented themselves last year, the overall outcome was positive. This year, we expect to navigate headwinds in multiple areas, but with better contributions from slippages and recoveries, we should see improvements. There may be challenges in the first half, but we remain confident we can achieve substantial profitability this fiscal year.

Operator, Operator

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