Earnings Call Transcript - LION Q4 2024

Operator, Operator

Ladies and gentlemen, good day, and welcome to City Union Bank Q4 FY '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, 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.

N. V. Kamakodi, CEO

Good evening, everyone. A 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 copies of the results and the presentation. I'm happy to announce that we have achieved two historical landmarks in this 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%, including a 50% special dividend for our 120th year. Before getting into the financial results, I would like to inform you about 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 after serving for 8 years in various capacities. With effect from May 4, 2024, Shri G. Mahalingam, our Director, has taken charge as the Non-executive Chairman. Shri G. Mahalingam had over 3 decades of career with RBI, reaching the position of Executive Director, and also had a 5-year stint with SEBI as a whole-time member. He joined our Board as an independent director in July 2022. On the senior management side, Shri R. Vijay Anandh has joined our bank as Executive President in March 2024 and has more than 25 years of banking experience covering retail banking, risk management, portfolio analysis, credit appraisals, recoveries, legal, collections, and due diligence. The Board has recommended his appointment as a full-time director, which is under the consideration of RBI. Additionally, about 10 executives in the rank of AGM and above have joined our bank recently to strengthen the senior and top management, enhancing our capabilities in retail, analytics, credit, operations, etc. In our Q4 2023 earnings call, we indicated that while there could be headwinds in margin and base figure growth, we expected to close the financial year '24 with decent PAT growth, substantial reduction in net NPA, improved coverage ratio, and ROA close to our long-term average of 1.5%. Our performance for the financial year '24 is largely in line with the forecast we shared with you during last year. Moreover, during our Q3 call, we mentioned we should achieve our 4-digit PAT growth for the financial year '24, which we have accomplished. Our NPA slippages have decreased significantly, and live NPA recoveries have surpassed live slippages, indicating we are on the right track to revert to pre-COVID slippage levels. The digital lending process is proceeding as per schedule, aimed at boosting credit growth in the coming quarters. ROAs are back to 1.5% plus, aligning with our long-term average, and our net interest margin is stable. Overall, our Q4 performance met expectations, and it has been a strong financial year for us. We have surpassed our expectation with a PAT figure of INR 1,016 crores, registering an 8% growth from the last year. In the Q4 financial year '24, our PAT recorded INR 255 crores with a growth of 17% compared to the Q4 financial year '23. We crossed the landmark of INR 1 lakh crore business, and our total business stands at INR 1,02,138 crores as of 31st March 2024. Our deposits stood at INR 55,657 crores, marking a growth of 6%, and our advances also improved by 6%, totaling INR 46,481 crores on a quarter-on-quarter basis compared to Q3. During our previous calls, we discussed the degrowth of KCC loans and related issues that initially led to the reduction in daily average advance growth. With improved credit growth in the last quarter, we are regaining stability. As of FY '24, total slippage stands at INR 1,013 crores compared to INR 1,276 crores in FY '23. Recoveries amount to INR 1,031 crores, which comprises INR 816 crores from live NPA accounts and INR 215 crores from technically written-off accounts. In the current quarter alone, slippage is INR 219 crores while recoveries total INR 275 crores, made up of INR 233 crores from live NPA accounts and INR 42 crores from technically written-off accounts. As stated in the last call, live recovery has consistently surpassed live slippage in the current quarter as well. The trend of recoveries exceeding slippages has contributed to the decline in both gross and net NPA numbers. As of 31st March 2024, gross NPA decreased to 3.99% compared to 4.47% as of Q3 FY '24 and 4.91% as of Q1 FY '24. Net NPA decreased to 1.97% compared to 2.95% in the previous year, signifying our ongoing success in improving asset quality. Our gross and net NPA has declined for three consecutive quarters, with net NPA falling below 2%. Furthermore, our net credit cost has notably dropped to 0.24% for FY '24 from 0.90% in FY '23. The SMA 2 numbers to total advances as of 31st March 2024 is at 2.08%. This financial year, we've on-boarded six insurance companies covering life, general, and non-life insurance, effectively doubling our insurance income contribution to INR 55 crores compared to INR 27 crores in FY '23. We expect significant growth in the current financial year as well. ROA for FY '24 is at 1.52% versus 1.46% last year, while yield on advances for Q4 FY '24 stands at 9.83% compared to 9.31% in the same quarter last year. Throughout FY '23-'24, yields on advances is at 9.72% versus 9.23% entering FY '22-'23. NIM stands at 3.66% for the current quarter and at 3.65% for the fiscal year. For Q4 FY '24, our cost-to-income ratio is 51.26%, while it stands at 47.06% for FY '23-'24, aligning with our guidance. Since we are making upfront investments, some elevation in cost-to-income ratio is expected as we await returns. We have also opened our 800th branch in Ayodhya and plan to establish an additional 50 to 75 branches in the current financial year. The digital lending initiative for MSME is nearly complete and should be operational before mid-June. Additionally, the expanded digital lending model will include secured retail products such as housing loans, LAP, etc. We anticipate that these investments and enhanced management will improve visibility on growth moving forward. On the asset quality side, we plan to continue our trend of reduced slippages and improved recovery through FY '25. ROA has been restored to our long-term average of 1.5% and is expected to stabilize around this level. The net interest margin is expected to remain stable with variations of about 5 to 10 basis points. We anticipate seeing benefits from the digital lending processes in the upcoming quarters. Our focus on cost efficiency means the cost-to-income ratio may remain elevated in the short term before gradual improvement is observed as benefits materialize from digital lending and other initiatives. In summary, we are witnessing a return to stable performance across all parameters, and we expect continued improvement moving forward. I will now open the floor for questions. Over to you all.

Operator, Operator

The first question is from Rajesh Mangal Agarwal from Rajesh Mangal & Company.

Rajesh Mangal Agarwal, Analyst

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

N. V. Kamakodi, CEO

We expect approximately INR 700 crores to INR 800 crores slippage for the current financial year. Regarding net NPA, our historical levels suggest it has usually ranged between 1.5% to 1.75%. By year-end, we expect net NPA to be around 1% to 1.25%. Other metrics will depend on technical write-offs, but these figures give a broader picture.

Rajesh Mangal Agarwal, Analyst

Okay. And what about the ROA, sir?

N. V. Kamakodi, CEO

It should improve from whatever we have achieved so far to the next level.

Operator, Operator

The next question is from Manish Shah from Investor.

Unknown Attendee, Analyst

Sir, I wanted to ask about the growth. What kind of growth are you seeing in the current year? Because you mentioned in the last 3 or 4 quarters that you would return to growth of 12% to 15%. Given the expansion in employees and costs, when can we expect that growth?

N. V. Kamakodi, CEO

We hoped for 12% to 15% growth in FY '24-'25, but execution faced headwinds. We are endeavoring to achieve those targets. We are currently aligning resources to establish a solid growth foundation, which may lead to better credit growth soon.

Unknown Attendee, Analyst

Another question was about other income and fee income. Do you see that going up? And how does your current confidence compare to the last call regarding loan growth?

N. V. Kamakodi, CEO

Yes, the growth figures for the current year indicate improvement, particularly in Q4, which has given us confidence. For Q1, we expect some lull, but substantial growth is anticipated in future quarters.

Unknown Attendee, Analyst

Comparing to last year, do you expect profit growth of at least 10% to 15% this year?

N. V. Kamakodi, CEO

We are working hard towards that goal.

Operator, Operator

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

Rohit Jain, Analyst

I have a couple of questions. The first one is on the cost-to-income ratio. It increased from around 48% to 51.2%. You mentioned that it will remain high until investments start yielding returns. Should we assume that this exit rate will hold for FY '25?

N. V. Kamakodi, CEO

You might see moderation in the second half of the year as income from new costs starts to materialize. We foresee an overall cost-to-income ratio between 41% and 47% for FY '25.

Rohit Jain, Analyst

So, the first half might be around the exit rate while the second half sees some benefits. Is the overall year expected to be between 47% and 51%?

N. V. Kamakodi, CEO

Yes, that aligns with our expectations.

Rohit Jain, Analyst

Your ROA was 1.52%, and you mentioned it should only improve this financial year despite the higher cost-to-income ratio. Is that correct?

N. V. Kamakodi, CEO

That is our focus.

Rohit Jain, Analyst

How should we perceive return on equity (ROE) at around 13%? Historically it was higher. Is this the new normal?

N. V. Kamakodi, CEO

The lower ROE is due to the higher capital we are maintaining. Once our growth engine kicks off and ROA improves, ROE should naturally improve as well.

Rohit Jain, Analyst

Given the stabilization of credit costs, is FY '25 going to be a year of consolidation rather than growth?

N. V. Kamakodi, CEO

No, we consider FY '23 and FY '24 as consolidation years. FY '25 should be the growth phase as we resolve final aspects.

Operator, Operator

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

Mona Khetan, Analyst

Firstly, on digital processes, are all MSME loans today up to INR 5 crores digitally dispersed in about 48 hours?

N. V. Kamakodi, CEO

Yes, and we are aiming to increase this limit to INR 7.5 crores as per RBI standards. The standards are set to ensure efficient processing within 48 hours.

Mona Khetan, Analyst

Regarding margins, last year's overall margins were at 3.6%, significantly lower than historical averages. Given that, how do you expect margins to perform?

N. V. Kamakodi, CEO

Historically, our margins have stabilized between 3.4% and 3.7%. The current margin of around 3.65% aligns with our long-term average, and we expect it to remain stable for now.

Mona Khetan, Analyst

Is it fair to say that competitive intensity is leading to lower yields overall across cycles?

N. V. Kamakodi, CEO

Yes, we have experienced variations; however, our long-term averages indicate that we are returning to more stable conditions.

Mona Khetan, Analyst

What percentage of your gold book is via cash disbursal?

N. V. Kamakodi, CEO

All gold loan transactions are linked to savings accounts; hence, essentially all disbursal is digital, converting instantly to cash if desired.

Operator, Operator

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

Rohan Mandora, Analyst

I want to understand the digital initiatives for retail products like home loans, LAP, and auto loans. What segments are you focusing on, and is the 48-hour disbursement timeframe from new lead generation or post-sanction?

N. V. Kamakodi, CEO

Our initial focus will be on existing customers who have taken loans from other institutions. The disbursement timeframe is expected to be achieved post-sanction.

Rohan Mandora, Analyst

For the SME and MSME segment, are we currently digitally underwriting as well?

N. V. Kamakodi, CEO

Yes, we're at the final stages of implementing API integrations, streamlining our processes significantly.

Rohan Mandora, Analyst

What is the total quantum of technology-linked expenses planned for FY '25 and FY '26?

N. V. Kamakodi, CEO

Last year, technology implementation added approximately 3% to our cost-to-income ratio. Significant incremental investment is assured in our digital lending processes and technology enhancements.

Rohan Mandora, Analyst

On growth between Tamil Nadu and outside Tamil Nadu, can you share the loan and deposit growth numbers for FY '24?

N. V. Kamakodi, CEO

The growth in Tamil Nadu is largely on par with overall average growth, as detailed in the presentation.

Rohan Mandora, Analyst

What is the current quantum of loans linked to EBLR?

N. V. Kamakodi, CEO

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

Operator, Operator

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

Sri Velamakanni, Analyst

Is the increase in employee expenses due to new hires in top management, and is this the new run rate we should expect?

N. V. Kamakodi, CEO

Yes, this reflects the depreciation related to the adjustment of allowances and new hires.

Sri Velamakanni, Analyst

Credit growth has improved sequentially. Last year you refrained from giving guidance; is your hesitation due to last year's unmet targets?

N. V. Kamakodi, CEO

Exactly, we prefer demonstrating our achievements before providing forward guidance.

Sri Velamakanni, Analyst

What is our current LCR ratio or liquidity position?

N. V. Kamakodi, CEO

We sit at approximately 200% as of now, and the details will be published in the forthcoming Pillar 3 disclosures.

Operator, Operator

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

Palak Shah, Analyst

Deposit growth this quarter was 6% Q-o-Q. What led to this growth, and what are your expectations going forward?

N. V. Kamakodi, CEO

We anticipate things will improve significantly as we move forward, but I cannot commit to specific numbers until we see firm indications.

Operator, Operator

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

Rakesh Kumar, Analyst

I am impressed by the stable margin and reduced NPA figures. Regarding recovery of technically returned loans, could you provide guidance on recovery pace in the coming year?

N. V. Kamakodi, CEO

Currently, our recovery department does not differentiate between written-off and live accounts. Their targets are holistic and focused on total recovery volumes, aiming to improve beyond last year's recovery total.

Rakesh Kumar, Analyst

What about MCLR progression from recent months?

N. V. Kamakodi, CEO

The divergent trends in MCLR increases can affect margins; prior delays in rate transmissions impacted our margin trajectory compared to regional peers.

Rakesh Kumar, Analyst

The EBLR and MCLR breakup is 55% and 45%, respectively. Correct?

N. V. Kamakodi, CEO

Yes.

Operator, Operator

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

M. B. Mahesh, Analyst

Has there been any loan reclassification this quarter?

N. V. Kamakodi, CEO

Yes, changes in definitions have led to some reclassification, particularly concerning MSME loan classifications.

M. B. Mahesh, Analyst

I noticed that you acquired loans in the current quarter totalling about INR 500 million. Is this aggressive acquisition something new, or is it standard operational disclosure?

N. V. Kamakodi, CEO

This could be a result of a couple of deals; it’s business as usual.

M. B. Mahesh, Analyst

Could you summarize the management changes you mentioned earlier?

N. V. Kamakodi, CEO

We've focused on building teams, especially in digital lending and retail. This includes addressing skill gaps and ensuring cultural compatibility in hiring. We have enhanced our senior management and made significant investments in capabilities to secure future growth. Mr. Vijay Anandh's approval for joining the Board is pending from RBI. We are contemplating adding another whole-time director once the decision is made.

Operator, Operator

The next question is from Rohan Mandora from Equirus Securities.

Rohan Mandora, Analyst

I want to reconfirm that Mr. Mahesh, heading the Credit department, left the bank shortly after joining.

N. V. Kamakodi, CEO

Yes, he relocated for family reasons very shortly after joining.

Rohan Mandora, Analyst

Considering the recent government notification to MSMEs requiring payments within 45 days, what impact might this have on credit demand?

N. V. Kamakodi, CEO

We observed mixed trends, with smaller entities reducing utilization while larger industries increased borrowing to meet MSME payment deadlines. Overall, there is a reduction in utilization across the board.

Rohan Mandora, Analyst

Are recent regulatory changes affecting gold loans impacting us in any way?

N. V. Kamakodi, CEO

No, we maintain strict standards based on multiple audits. We have historically kept losses from purity miscalculations minimal.

Rohan Mandora, Analyst

What was our AFS reserve as of April 1st under the new valuation guidelines?

N. V. Kamakodi, CEO

The difference in valuation was about INR 20 crores.

Operator, Operator

The next question is from Rajesh Mangal Agarwal from Rajesh Mangal & Company.

Rajesh Mangal Agarwal, Analyst

In the presentation, the CASA ratio is 30%, which is lower than the industry average. What’s the reason?

N. V. Kamakodi, CEO

It is our long-term trend, but we have improved by about 7-8% in the last few years. We aim to keep improving it.

Rajesh Mangal Agarwal, Analyst

Should we aspire to improve this to industry levels?

N. V. Kamakodi, CEO

The aspiration is always present, but substantial growth requires time and sustained effort.

Operator, Operator

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

Unknown Attendee, Investor

After addressing non-performing assets, can we anticipate consolidation in technological and digital initiatives this year and growth next year? Or are there already early signs of growth this year?

N. V. Kamakodi, CEO

The consolidation phase primarily concludes in FY '22-'23 and FY '23-'24. We expect to start realizing growth potential sooner than anticipated.

Unknown Attendee, Investor

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

N. V. Kamakodi, CEO

We do not expect a substantial increase in fee income due to digitization, but we have noted significant growth in insurance income, which we expect to continue.

Unknown Attendee, Investor

Why was there a significant drop in other income last quarter?

N. V. Kamakodi, CEO

The decline in other income is due to multiple factors, including treasury income setbacks and recovery variances from written-off assets.

Unknown Attendee, Investor

In FY '24-'25, have you begun to see the benefits of your digital initiatives?

N. V. Kamakodi, CEO

Indeed, we saw improvements starting in February and March, with our first quarter showing higher inflow sanctions compared to previous years.

Operator, Operator

The next question is from Jai Mundhra from ICICI Securities.