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.

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 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 shared our expectations for the financial year '23 and '24. We aim for 12 to 15 percent growth for the financial year '24, with growth skewed towards the year-end. We are working diligently to achieve double-digit advance growth. We are making strides in the digital lending process initiated with help from BCG, and we have rolled out the first phase of the automated loan underwriting process. It may take a few quarters to reflect benefits in our bottom line. Despite challenges regarding margins, base figures, and growth, we expect to finish the financial year '24 with decent PAT growth, substantial reduction in NPA, improved coverage ratio, and ROA close to our long-term average of 1.5 percent. Our recoveries exceed our slippages, and we anticipate this trend continuing in the subsequent quarters, returning to pre-COVID slippage levels. We are strengthening the leadership team to make our organization future-ready with digital, retail, etc., thus enabling it to become the growth engine for the future. We are, by and large, progressing on these lines, except for the growth, where we are just beginning to see positive trends. With the digital process implementation, we have started seeing things turning positive in a phased manner. While most peers are achieving mid-teens growth in advances due to retail consumption lending, unsecured lending, personal lending, etc., we remain cautious in those areas. After the pandemic, our growth settled during mid-financial year '22. Comparing December '22 with December '21, we recorded terminal advance growth of 12 percent, and daily average advance growth from December to December was 14 percent. Post-COVID, our focus remained on gold loans, which grew by 34 percent in that same period. After regulatory observations on KCC agri loans in December '22, we had to scale down the KCC gold loan by about INR 4,000 crores, starting from January 2023. As discussed, the amount stood at INR 229 crores as of December 31, 2023, down from INR 4,000 crores. During the same period, our non-agriculture gold loans grew by 28 percent or INR 1,200 crores. You may also recall the divergence issue from last year. Due to these changes, our daily average advance growth plummeted from 12 to 14 percent in December '22 to 3 to 4 percent until September '23. With the introduction of digital lending processes, we are starting to see improvements. Over the last two months, we have experienced INR 400-crore monthly credit growth, which we believe will translate to returning to 12 to 14 percent annualized growth going forward. We hope these digital lending processes will bolster this acceleration. All other factors have settled well. The recoveries in NPAs are surpassing slippages, resulting in reducing gross NPAs, net NPAs, and provision needs. Therefore, we are witnessing decent PAT growth, influenced by reduced credit card expenses, despite headwinds in growth and operating profit. Our PAT has increased by 16 percent in Q3 financial year '24, amounting to INR 253 crores compared to INR 218 crores in Q3 financial year '23. The ROA for Q3 was 1.49 percent compared to 1.34 percent in Q3 financial year '23 and 1.52 percent for the nine months of financial year '24, which aligns with our long-term average. The PAT for nine months in financial year '24 stands at INR 761 crores, and we aim to achieve a four-digit PAT figure for financial year '24. Our annualized slippage ratio for Q3 diminished to 1.7 percent in financial year '24 from a peak of 5.56 percent in Q4 financial year '20. It also shrank from 2.06 percent in Q2 financial year '24, indicating a sequential decrease back towards pre-COVID levels. The slippage for Q3 was INR 187 crores, while total recoveries reached INR 289 crores, which consists 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 slippages in the current quarter as well. We anticipate this trend will continue in the upcoming quarters. Our gross NPA decreased to 4.47 percent in Q3 financial year '24, down from 4.66 percent in Q2 and 4.91 percent in Q1. The net NPA reduced to INR 941 crores as of December 31, 2023, translating to 2.19 percent for Q3 financial year '24 compared to 2.67 percent in Q3 financial year '23. The net NPA trend is also decreasing, sitting at 2.51 percent in Q1, 2.34 percent in Q2, and 2.19 percent in Q3 of financial year '24. Our yield on advances for Q3 is 9.62 percent, up from 9.16 percent in the same quarter last year. Excluding one-time interest reversals of around INR 25 crores for nonperforming FITL loans, the yield would have been 9.83 percent for Q3 financial year '24. Our NIM for the current quarter is 3.5 percent while for nine months in financial year '24, it tallied at 3.63 percent. Adjusting for the one-off item, our net interest margin for Q3 would stand at 3.67 percent and 3.69 percent for the total of nine months in financial year '24. Our cost-to-income ratio for Q3 is 48.64 percent, while for nine months it stands at 45.65 percent. As mentioned in prior calls, this elevated cost-to-income ratio results from expenses involved in automation, but it should return to the 40 to 45 percent range post-completion. To date, we opened 20 branches this financial year, bringing our total to 772. By fiscal year-end, we plan to open our 800th branch. We are in advanced stages of strengthening our leadership team. The first set of senior team members is joining in February, which will contribute to enhancing our digital lending, retail, data analytics capabilities. By the release of the next quarter results, most of them will have joined our bank. We will be able to share more details during our next annual call. In summary, we expect to achieve a four-digit PAT for financial year '24 for the first time. With a significant reduction in NPA slippages and live NPA recoveries surpassing live slippages, we are on the right path to returning to pre-COVID levels of NPAs. Our performance aligns well with the numbers shared, except for growth. In the last two months, we’re witnessing positive growth in line with our expectations, which we believe will continue to improve. The digital lending process is on schedule, aiming to achieve enhanced credit growth in subsequent quarters, and ROAs are back to 1.5 percent, which is our long-term average. Our net interest margin remains stable.

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

So my first question is on growth. If I remember correctly, from your opening remarks, you're saying that guidance for FY '24 has been maintained at 12% to 14%.

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

Okay. Got that. And secondly, you mentioned about this FITL impact, which hurt your yields in Q3. Could you elaborate a bit on what exactly has happened here and how that has resulted in interest reversal?

See, the FITL is essentially a facility provided to loans that underwent restructuring during COVID. The INR 25 crores reversal results from the interest income of those FITLs given to borrowers. When these restructured loans turn into NPAs, the interest portion gets reversed in a way that it affects the interest income.

Got it, got it. Okay. Because of some restructured book turning into NPA. Thank you, 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 that you're talking about. You mentioned we will be near double digits. So that means that we need to effectively get a growth rate of 8% to 9% in this quarter, which seems very difficult and optimistic considering in the past three quarters, it has been negative growth or very low single-digit growth of 2% to 3%. So what makes us confident about achieving that 8% or 9% growth? How has been the progress in January to support this number?

You're right. Typically, we aimed for fourth quarter growth anywhere from INR 2,200 to INR 2,400 crores. In the highest case, it was INR 2,768 crores in '21 '22. As you've pointed out, this may seem optimistic. However, I can tell you there are a few positive indicators. Firstly, the unwinding of the KCC gold loan has mostly completed. We anticipate some growth back in that segment. The first phase of automated lending for loans under INR 3 crores has essentially completed, which also supports growth. Though we've faced headwinds, we are gradually addressing them. We are seeing average credit growth returning about 1 percent per month. This should accelerate, as we were stabilizing during the last two quarters.

But in Q2, we had guidance of double digits too. In between, some media reports mentioned growth would drop to very low single digits of 1% or 2%. The company clarified earlier around mid-December to stick with the 12% to 14% guidance. If the last two months' growth rate is just 1%, could you clarify the overall guidance?

I began by compiling all points discussed in earlier calls. Initially, we expected a growth rate of 12% to 14%, adjusted to double digits later. Now we’re witnessing some positive developments despite setbacks. We are making efforts to ensure growth returns as we anticipate. Nonetheless, we will take time to achieve our desired growth level.

What deposit growth are we targeting for the year?

We expect deposit growth to match credit growth. We aren't aggressively focusing on deposit growth currently. Once we stabilize advances, we will work on deposits accordingly. Our credit deposit ratio is around 80 to 83 percent and our capital adequacy stands above 20 percent.

The next question is from the line of Franklin Moraes from Equentis Wealth Advisory.

Could you elaborate on the year-on-year growth? At the start, you mentioned 12% to 15%. Is that still true?

To be clear, I recapped expectations from the previous conference calls. Initially, we targeted growth at around 12% to 14%. We thought we could sustain double digits, but there's no assured number now. We’re striving for optimum growth as conditions get better, primarily due to our gold loan adjustments.

When do you think you'll return to that 12% to 15% guidance?

We may present a clearer number once we evaluate the fourth quarter during our next call.

You guided on lower NPAs by March '24. Does that still hold? Any visibility beyond that?

Yes, we have previously indicated that we expect to benefit from around INR 200 crore concerning lower slippages for both last year and this year. This trend is likely to continue as we see improvements in both recovery and slippages.

Is this improvement only for one quarter, or can we anticipate more?

Yes, we expect this positive trend to last for at least 3 to 4 quarters.

The next question is from the line of Rajkumar Vaidyanathan, individual investor.

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

The impact has been insignificant. For instance, during the Thoothukudi floods, a few branches were non-operational for a few days. In Chennai, branch operations were slightly affected. Overall, we don't expect significant stress due to the floods.

The second question is about bond yields starting to soften. How do we expect that to uplift the bottom line in upcoming quarters?

If this trend continues, it could provide some profit booking opportunities. However, I cannot assure to what extent it will last. Rules around profit booking from HTM are changing from April 2024, which could impact our capacity for such actions.

The next question is from the line of Arul Selvan, Independent Advisors Private Limited.

Can you give more insight into changes implemented for digital lending, with BCG's assistance? What initiatives have been taken by the bank?

The first phase of our automation project is completed for loans under INR 3 crores. The turnaround time for customers has now been reduced to possibly one day, with 70 to 80% of those decisions made within 48 hours. What took weeks or months now occurs much faster, enhancing customer experience. Now we are expanding this automated approval process to INR 3 crores to INR 5 crores, testing both manual and automated approaches for one month. We are also implementing API integrations to assess risk better and improve approval quality.

How is the quality of underwriting affected by this automation? Will it aid the team or remain unchanged?

The automation will improve decision-making quality significantly by incorporating numerous checks and balances that manual processes might miss. This will ultimately lead to fewer slippages and an enhanced decision-making process overall.

Could you clarify which segments these digital processes are focused on currently?

We are beginning with MSME loans under INR 3 crores, then retail loans below INR 5 crores, and later expanding up to INR 7.5 crores. Main focus will largely remain on our core products initially while gradually considering options for secured retail products too.

The next question is from the line of Karthik from Pinpoint Asset Management.

What is the underlying demand for credit in your MSME segment? You mentioned in Q2 that demand was improving after several quarters. However, with sluggish loan growth currently, how much is this lag due to your system readiness versus actual demand?

The situation is improving overall. Significant requests are coming from MSME borrowers, particularly for solar energy projects. Capacity expansion requests are increasing in the usual MSME front. However, we have seen weakness in the textile export sector, which used to comprise a large part of our portfolio. Overall, while we faced challenges in onboarding new customers during COVID, now credit proposals are returning to pre-COVID levels.

What kind of loan growth do you anticipate over the next 12 to 18 months once everything stabilizes?

We have operated around a 15-16% return on equity, which dipped to about 10% during COVID but has steadily recovered to about 13%. My primary focus is to achieve sustained growth of around 16-17% within the next 4 to 8 quarters, which will also improve our return on equity.

The next question is from the line of Rajat Jain, individual investor.

You said the cost-to-income ratio is currently impacted due to expenses from BCG and digitization. How long do we expect that to continue?

This situation will maximum last a few more quarters.

The number of loans under INR 7.5 crores is significant in your overall loan book. Once you automate this process, how much capacity will this create for credit appraisals?

Yes, that is correct. The less than INR 7.5 crores loans account for 60 to 70% of our total loan book. The automation will significantly enhance our processing capacity for these loans.

If you adjusted the decrease in Kisan credit card and gold loans, how much additional growth could we have seen?

If we factor in at least 50% of that, we could have seen about 5% extra growth for calendar year '23.

The next question is from Kunal from Emkay Global.

You mentioned earlier that there was a one-off item. Could you clarify what that item was?

The one-off concerns funded interest term loans, where the interest portion has been reversed. In our case, that amounts to INR 25 crores.

The next question is from Chintan Shah from ICICI Securities.

If we look to FY '25, can we assume a growth rate in double digits, around 12% or 15%? Is that reasonable?

As of now, we remain optimistic based on current trends. However, I won't commit to a firm number until we see two more quarters of firm performance.

If we expect a decent growth in FY '25, would we need similar deposit growth around 15%? How would that be managed considering the current flat deposit growth?

Deposit growth will not impede our advances growth moving forward. We maintain a high ratio of our deposits through CASA and retail channels, which provides us flexibility in managing our capital effectively.

If we face a spike in deposit costs or declines in yield, will that put margins under pressure?

While some minor fluctuations might occur, we've historically managed to smooth the movements of cost of deposits and yields of advances without significantly disrupting our ROA profile.

What is the total provision on the restructured portfolio of around INR 1,000 crores?

The average provision requirement is about 10%, or around INR 100 crores, but you might want to refer specifically to our CFO for detailed numbers.

We made some contingent provisions during the quarter. Was that specific or just a general practice?

It's a general practice and is evaluated based on the situation upon review.

The cost of deposits has seen a sharp increase this quarter. Are there any one-offs related to this?

This increase is a normal occurrence, and we have seen a corresponding increase in yield, hence our margins have held up well.

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

Thank you all for attending. We are gradually getting back on track towards achieving a four-digit profitability figure for the current year, perhaps for the first time in our history. All the challenges we faced post-COVID in the financial year '22 and '23 are being systematically addressed. For growth, we are actively working on solutions, and we see improvements occurring step by step. If you have further questions, please reach out to Mr. Raghuraman, who oversees our investor relations, or any of your established contacts. Thank you 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. Thank you.