Earnings Call Transcript
Lionsgate Studios Corp. (LION)
Earnings Call Transcript - LION Q2 2024
Operator, Operator
Ladies and gentlemen, good day, and welcome to City Union Bank Q2 FY '23-'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.
Prabal Gandhi, Host
Thank you, Saber. On behalf of AMBIT Capital, I once again welcome you all for City Union Bank's Second Quarter Earnings Call. 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 remarks, after which we can open the floor for Q&A. Thank you, and over to you.
N. V. Kamakodi, CEO
Good evening, everyone. Dr. Kamakodi here. Happy to welcome you to this conference call to discuss the unaudited financial results of City Union Bank for the second quarter and the first half year ended 30th September 2023. The Board approved the results today, and I assume you all have received the copies of the results and the presentation. During the March '23 and June '23 calls, we shared our expectations for the financial year '23-'24, aiming for a 12 to 15 percent growth, skewed towards the year-end. We hope to close the financial year '24 with a return on assets (ROA) of 1.3 percent, with NPA recovery being a major contributing factor. In the absence of treasury profit opportunities in the increasing interest rate scenario, we anticipate a cost-to-income ratio in the range of 42 to 45 percent. We expect net interest margin (NIM) pressure, currently expected at the current level plus or minus 10 basis points. We are on track with most things, and in some aspects, things are even getting better. We have seen about INR 1,280 crores or 3 percent credit growth during the second quarter of 2024. The soft launch of the digital process for MSME lending below INR 3 crores has commenced, executed by the Newgen Software team in coordination with BCG. We expect to achieve the numbers shared earlier, particularly for credit disbursement and growth as we progress. We closed the second quarter of financial year '24 with a profit after tax of INR 281 crores, compared to INR 276 crores in the second quarter of financial year '23. We had the highest profit after tax of INR 276 crores in the second quarter last year, followed by some moderation in the subsequent three quarters. This quarter, as mentioned, we achieved a profit of INR 281 crores. The ROA for the second quarter of financial year '23-'24 is 1.69 percent compared to 1.4 percent in the first quarter of financial year '24, while it was 1.46 percent for the entire financial year '23. Typically, we have a ROA above 1.5 percent during pre-COVID years. In financial year '20, we had a ROA of 1 percent with a reversal above that due to COVID provision. This quarter, our ROA is at 1.69 percent. We closed the first half of financial year '24 with a profit after tax of INR 508 crores and hope to reach a 4-digit profit after tax figure for the full financial year '24 for the first time. The profit discussed in this quarter is the highest ever profit that the bank has declared in its 120 years of progress. We are hopeful to achieve this figure despite headwinds in operating profit, mainly due to positive contributions from credit cost. Our slippage ratio for Q2 has come down to 2.06, almost equal to pre-COVID levels, and our absolute slippage number for Q2 FY '24 is INR 225 crores. Total recoveries made are INR 299 crores, comprising INR 230 crores from live NPA accounts and INR 61 crores from recoveries from previously written-off accounts. For the first time in the recent past, live recoveries have surpassed live slippages, and we expect this trend to continue moving forward. The net NPA has fallen below the INR 1,000 crore mark after many quarters. Overall, SMA 2 numbers to total advances as of 30th September 2023 stand at 2.05 percent, down from 2.43 percent in the first quarter of financial year '24. We also want to inform you that the RBI inspection for the position as of 31st March 2023 was completed, and there are no disclosure requirements with respect to divergence in asset classification or provisioning per the exact guidelines provided in the results. Last year, in the third and fourth quarter, we faced issues that impacted profitability going forward. This year, we don’t have to make any disclosures regarding extending the deadlines. To sum up, we have entered a phase where NPA slippages have significantly decreased, and NPA recoveries have started to exceed slippages. Therefore, we will see a substantial reduction in credit cost and NPA returning to pre-COVID levels, which will reduce provisions required significantly and consequently enhance profitability. The soft launch of digital lending products has begun, which is expected to help achieve improved credit growth in the second half as discussed in earlier calls, targeting double-digit credit growth for the whole year. Both projects executed by the Newgen Software team, coordinated by BCG, are on track, assisting us in achieving better growth moving forward. ROAs are back above 1.5 percent, as they used to be pre-COVID, and the net interest margin currently stands at 3.74 percent. Despite growth headwinds, we aim to close financial year '24 with a 4-digit PAT, significant reduction in net NPA, and ROA around our long-term average of above 1.3 percent. Overall, except growth, progress has been positive across all parameters like net interest margin, ROA, etc., with some setbacks post-COVID, mainly in slippage ratios. We took our foot off the growth pedal in financial year 2020. Although we continued growth with gold loans, regulatory observations forced us to stop the agri-gold loan KCC product, acting as a headwind to our growth. However, growth in other core sectors has started improving, particularly with the new digital lending platform. Overall, things are aligning with our long-term progress; the progress is visible, and we will show PAT growth by reducing credit costs this year. Once growth picks up, all parameters should return to our long-term benchmarks. Overall, things are settling well, and we anticipate improvements going forward. With these opening remarks, I open the floor for questions and discussions.
Operator, Operator
The first question is from the line of Rohan Mandora from Equirus Securities.
Rohan Mandora, Analyst
Congrats on the improved set of numbers. Sir, firstly, in terms of the upgrades that we have seen this quarter, could you share some insight on which segments they are coming from and when these accounts slipped?
N. V. Kamakodi, CEO
Yes. In fact, we had discussed during the last call. Essentially, whenever an account upgrades, before the release of quarterly numbers, we effectively take that on our collections. However, after discussions, we noted some observations during the inspection that led to some adjustments on our reporting of upgrades. Upgrades are occurring across various sectors, with the most notable being an upgrade from a resort account of about INR 19 crores, which has shown improvement in collections. Another upgrade came from a contractor for the Government of Tamil Nadu, who received pending payments post-quarter end. We also saw recoveries in the fishing sector that led to upgrades. The upgrades span various sectors, driven primarily by delays in receivables, particularly from government sectors, which once resolved have led to these account upgrades.
Rohan Mandora, Analyst
And sir, secondly, regarding the provision coverage ratio (PCR), despite us containing the provisioning line item for this quarter, we have not increased the PCR, which is showing around the 50% to 51% mark. Will we remain comfortable at this level, or could we see an increase in the PCR over the next two years? Also, what was the credit cost guidance for FY '24?
N. V. Kamakodi, CEO
Yes. We have explained multiple times in earlier calls. Our average recovery for the portfolio level is that if INR 100 slips, we recover about INR 65 to INR 70. Therefore, anything above INR 35 to INR 40 in provisioning is typically not needed based on our track record due to available collateral and its liquidation. So the 70% coverage ratio we once achieved repeatedly asked about is now seen as aligned with our requirements. We do not expect significant improvement in the coverage ratio as we regard collateral availability and trends in our recovered accounts. Our focus remains on reducing net NPA levels, aiming to reach between 1% to 1.5% as we move forward. When that target is achieved, the coverage ratio may naturally improve as a byproduct. This approach regarding the coverage ratio has been consistent in our communication.
Rohan Mandora, Analyst
Got it, sir. And what is the specific credit cost guidance for this year?
N. V. Kamakodi, CEO
As we've observed incrementally, when recoveries exceed slippages, the net incremental provisions required automatically diminish as we work towards bringing net NPA closer to pre-COVID levels. You can calculate accordingly based on the trends.
Rohan Mandora, Analyst
And lastly, there's been an increase in yield this quarter. Could you elaborate on the benefits coming from interest reversals and any other reasons for the increase in yields?
N. V. Kamakodi, CEO
Essentially, there was an incremental pass-through of rates during the middle to end of the first quarter, and the full effect was seen in the subsequent quarter, leading to the yield increase.
Operator, Operator
The next question is from the line of Nilesh Jethani from Bank of India Mutual Funds.
Nilesh Jethani, Analyst
My first question was on a macro level, many of the peers are discussing the stress they are facing in the MSME sector. What is our outlook on the same?
N. V. Kamakodi, CEO
We are observing two contrasting trends. The first is that most MSMEs have emerged from their COVID-related issues and are operating well with improved cash flows. Asset quality issues are mostly resolved. Conversely, we are not witnessing the same level of growth and capacity expansion as seen in previous cycles. Investment growth seems limited and mostly aimed at renewable energy projects, with a broader investment cycle yet to pick up as we would expect.
Nilesh Jethani, Analyst
Got it. Internally, considering the credit cycle and NPA cycle we are in, what GNPA, NNPA, or credit cost levels would prompt us to increase growth initiatives on the credit side?
N. V. Kamakodi, CEO
Could you please repeat that question and come closer to the mic? I'm not able to understand you clearly.
Nilesh Jethani, Analyst
I'm asking about the external growth issues you've mentioned. At what GNPA levels or provision numbers would we press the pedal for growth?
N. V. Kamakodi, CEO
Historically, our slippage ratio pre-COVID was between 2% to 2.5% of closing advances. During financial years '21 and '22, it escalated to 3% to 3.5%. Our bank’s GNPA peaked at around 5.7%, while our branch suffered from COVID-era delays affecting recoveries. The current quarter shows SMA numbers around 2% with substantial improvements, indicating lowered stress levels. We're focusing on reducing the net NPA to 1% to 1.5% levels for comfort in our growth outlook. The requirement for incremental provisions will be significantly lower as recoveries begin to exceed slippages.
Nilesh Jethani, Analyst
Will this translate into pressing for growth should we expect to see these numbers drop?
N. V. Kamakodi, CEO
Indeed, we have initiated growth strategies as mentioned in previous calls. Growth is expected to skew towards the second half of the financial year with about 2% to 3% quarterly growth already seen in Q2. Additionally, the introduction of the digital lending process, which has already started its soft launch, further supports our growth targets.
Operator, Operator
The next question is from the line of Anand Dama from Emkay Global.
Anand Dama, Analyst
Sir, my question is on margins. Earlier, you indicated that RBI had observations on the MCLR. Additionally, there were some interest derecognitions due to subventions on farm loans. Any updates on that?
N. V. Kamakodi, CEO
We have made representation to the RBI and are awaiting their response regarding our observations. As mentioned earlier, due to those observations, we are not currently recognizing certain income. Some yield transfer has occurred, leading to marginal improvements as a result.
Anand Dama, Analyst
Is it possible for you to share the unrecognized interest income?
N. V. Kamakodi, CEO
We reported this in the fourth quarter, indicating it was about INR 20 crores.
Anand Dama, Analyst
So, first and second quarters, won't there be any addition to the previously mentioned unrecognized interest?
N. V. Kamakodi, CEO
No. Normally, this product concludes in a year. Once the observation arose, we ceased recognizing that income, as explained in earlier calls.
Anand Dama, Analyst
Understood. Sir, I would also like to address the recent situation where Uday Kotak obtained a Board position here. Previously, there were discussions about your stepping down from the role of MD and CEO. Will you consider a position on the Board post your retirement?
N. V. Kamakodi, CEO
I shared earlier that the Board has appointed a subcommittee to explore potential candidates. They’ve initiated the scouting process to transition smoothly when my term concludes in the upcoming months.
Anand Dama, Analyst
But you could still consider a Board position, right, after retiring as MD and CEO?
N. V. Kamakodi, CEO
You have about two years left, Anand, so it’s difficult to provide a clear answer at this moment. We need to allow time for things to settle down.
Anand Dama, Analyst
Sure. On the PCR front, you mentioned that while you believe the specific PCR is reasonable, we’ve seen this issue with another bank, AU, where they were required to increase their PCR beyond 70%. To prevent a similar situation with RBI, wouldn’t it be wise to proactively increase our PCR and build some buffers?
N. V. Kamakodi, CEO
We've intended to achieve our targets for net NPA. As that reduces, the coverage ratio will increase. These measures are interconnected, and we firmly emphasize progressing towards a net NPA level of approximately 1.5% to 2%, which parallels pre-COVID scenarios. We maintain a steady provisioning strategy that will aid this increase in coverage.
Anand Dama, Analyst
Of course, your guidance of about 10% loan growth still stands for the full year?
N. V. Kamakodi, CEO
Yes, that remains our target, and we are working towards achieving it.
Operator, Operator
The next question is from the line of Neel Mehta from Investec.
Neel Mehta, Analyst
My first question concerns employee cost. What’s behind the 20% quarter-on-quarter increase in employee costs this quarter?
N. V. Kamakodi, CEO
The annual increments that take effect on July 1 led to this increase sequentially. Comparing first half to first half shows a 6% increase.
Neel Mehta, Analyst
Okay, fair enough. Regarding accounting for recoveries, do we net it off from provisions when we recognize credit costs or treat it as other income in our P&L?
N. V. Kamakodi, CEO
If an account is written off, it is recognized as income. However, if a live account gets upgraded or collected, it gets shifted accordingly.
Neel Mehta, Analyst
In that case, if it’s a live account that hasn’t been fully written off, it would be net of credit cost, right?
N. V. Kamakodi, CEO
Yes, any recognized loss gets deducted from the provision made, and any remaining provision is allocated elsewhere.
Neel Mehta, Analyst
Understood. What would be the LCR level for our bank this quarter?
N. V. Kamakodi, CEO
As usual, it’s close to about 200%, which will be available in our report soon.
Operator, Operator
The next question is from the line of Mr. Rakesh Kumar from B&K Securities.
Rakesh Kumar, Analyst
Very strong performance. I have just one question about BCG – how are we positioned with respect to that, and what progress have we made?
N. V. Kamakodi, CEO
As I mentioned during my opening remarks, the actual software has been developed by a company called Newgen, with support and coordination by BCG. The first product for MSME loans below INR 3 crores has already seen its soft launch and is set for use in select branches over the next 10 to 15 days. After addressing any issues, it should be fully operational by mid-November. Additional products are in the pipeline, and the complete setup is expected to be running by the end of the third quarter.
Rakesh Kumar, Analyst
Post-transition, there should be a significant improvement in turnaround times for MSME customers, correct?
N. V. Kamakodi, CEO
Yes, that’s the expectation and the primary objective of this whole exercise, leading to positive results in the second half.
Operator, Operator
The next question is from the line of Jai Mundhra from ICICI Securities.
Jai Mundhra, Analyst
Congratulations on a good quarter. Continuing from the previous question, to clarify, is the LOS implementation across all products at the bank level expected to be completed by early January next year?
N. V. Kamakodi, CEO
Yes, that is our timeline. By the third quarter results call, at least 50% to 60% of products should be fully operational, with the remainder either in soft launch or beginning to deliver results.
Jai Mundhra, Analyst
Does the LOS implementation affect the historical growth pattern we typically see, with expected upticks in the third and fourth quarters? Should we expect changes?
N. V. Kamakodi, CEO
We don’t foresee major changes in historical patterns. What we anticipate is reduced turnaround times allowing for more efficient processing, which should indirectly help decrease the slippage ratio over time.
Jai Mundhra, Analyst
On yield, you mentioned in your opening remarks that the rise in yield is partly due to improved bargaining power in pricing. But looking at your recent MCLR reductions over the last two quarters, how do both aspects connect?
N. V. Kamakodi, CEO
I did not mention anything contrary; the yield increase came from the interest rate transmission we enacted towards the end of the first quarter that completely took effect in the second quarter. We had missed some transmissions last year, affecting our yield, but recent hikes have begun to take effect.
Jai Mundhra, Analyst
Was this quarter's yield increase attributed to better card rates or better pricing, or both?
N. V. Kamakodi, CEO
The yield increase primarily resulted from rate transmissions that occurred in the first quarter, along with better bargaining that led to the yield increase collectively.
Jai Mundhra, Analyst
This quarter witnessed negative net slippages. Is there a significant impact on NIM from this change? If you had a quantifiable impact overall due to negative slippages?
N. V. Kamakodi, CEO
The difference is minimal, around INR 30 crore to INR 40 crore. It’s not significant enough to impact NIM significantly, particularly on the differential interest component.
Jai Mundhra, Analyst
This quarter, while we saw negative net slippages and gross slippages declining, other banks have reported ongoing negative net slippages. What structural changes, apart from improved timing, contribute to our positive recovery?
N. V. Kamakodi, CEO
We appear to be at least a year behind several peers, who faced significant slippages prior to us. Our recovery cycle may seem slower since the timing of our slippages occurred later, particularly around COVID-related delays. That said, recoveries are catching up, and our live recoveries are outpacing slippages.
Jai Mundhra, Analyst
It sounds like we can expect to sustain these negative net slippages, correct?
N. V. Kamakodi, CEO
Yes, as long as there are NPAs available for recovery, we can expect this trend to persist for the next couple of years.
Operator, Operator
Can we expect any further pass-through increase in rates?
N. V. Kamakodi, CEO
We don’t expect any more hikes moving forward, though there’s a 25% likelihood of a minor increase, perhaps 25 basis points. However, overall, we anticipate no substantial rate hikes.
Operator, Operator
As there are no further questions from participants, I now hand the conference over to the management for closing comments.
N. V. Kamakodi, CEO
Thank you all once again for participating in this call. We have indeed transitioned to a phase where slippages have improved, recoveries have surged, and overall credit costs have considerably decreased. This trend is anticipated to continue over the coming quarters. Our ROA and efficiency metrics are aligning closer to our long-term averages, surpassing initial expectations. The path ahead primarily involves showing growth, where initial signs are evident. We believe this digitization and a new LOS introduction will enhance our efficiency, targeting double-digit growth in advances primarily from the second half, reflecting historical growth patterns. Overall, we feel optimistic, and as NPA pools decrease and our credit costs stabilize, we expect adequate growth to support our profitability moving forward. As we have stated throughout our discussions, we project promising growth numbers in the upcoming periods. Thank you all for joining today.
Operator, Operator
Thank you very much. On behalf of AMBIT Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.