ESAF Small Finance Bank Limited (ESAFSFB) Q1 2027 Earnings Call Transcript

Ladies and gentlemen, good day and welcome to ESAF Small Finance Bank Q1FI27 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touchstone phone. Please note that this conference is being recorded. I now hand the conference over to Dr. K. Paul Thomas, Managing Director and Chief Executive Officer. Thank you, and over to you, sir.

Thank you, and good afternoon. We welcome you to the Q1FI27 Earnings Call of ASAP Small Finance Bank. Joining me today are my colleagues, Mr. Josh K. John, Executive Director, and Girish CP, EVP, and CFO. Crossing 50,000 to our business is more than a numerical milestone. It reflects the successful execution of our transformation strategy over the last two years. We have consciously diversified our portfolio, strengthened underwriting, improved collections, enhanced our liability franchise, and invested significantly in technology. The improvements we are seeing today are therefore structural rather than cyclical. I would like to thank all our stakeholders, including our employees, and most importantly, our customers, for the trust they have placed on us. Our MARG strategy has clearly been the key highlight of our transformation journey, and all the constituent segments of MARG, especially gold, Agri, vehicle, and mortgage have all shown strong growth both on YOY and quarter-to-quarter basis. This portfolio also has lower delinquencies, which has helped us in improving our asset quality. Our objective is no longer to pursue growth. Through a single product or customer segment, instead, we are building a well-diversified retail franchise where secure lending, emerging households, microfinance, deposits, and digital capabilities complement each other. This creates a more resilient balance sheet across economic cycles. Another important area for us now where we are looking at renewed focus is the emerging household loans category. And we believe it to be the next catalyst for growth. Emerging household represents customers graduating from financial inclusion towards mainstream retail banking. These customers already have established repayment behavior and growing income profits. By serving them through a broader suite of banking products, we deepen relationships while improving portfolio quality and lifetime customer value. The idea is to use a calibrated approach and build on our strong presence across rural and semi-urban geographies to provide a wider range of bagging products and financial solutions to customers who have progressed beyond traditional microfinance. These customers should mostly be individuals, self-care groups, small entrepreneurs, and other emerging business customers with a nice-man ticket price of 10 lakhs. Over time, we expect emerging households to become one of the largest customer franchises within the bank. All our strategies have been built with a clear focus on creating a stable, diversified, and resilient asset base that is supported by disciplined execution. Investments in technology, prudent risk management, strong governance and operational efficiency, this will help us serve a wider customer base. and further improve our financial and business parameters in the coming quarters as well. On the macro front, the Indian economy and the banking sector continue to show resilience despite the ongoing West Asia crisis, with healthy predict growth, approach segments, and steady deposit mobilization. The events have not had any material impact on our business or operating performance. We remain cautious and watchful for future developments. So overall, Q1FI 27 has been a good quarter for us and gives us confidence that we are moving in the right direction for the next phase of growth. The MFI sector appears to be gaining momentum. We have enhanced our sector portfolio and financial parameters have started. Last two years, because of the other quality and industry challenges, we could not fully leverage on the network that we have built. But going forward, we are seeing a great opportunity to efficiently build on the strength of this network, present mostly in the rural and semi-urban areas, to expand our deposit franchise and strengthen our lending business, ultimately ensuring sustainable profitability. I now invite our Executive Director, Mr. George K. John, to take you through the next segment.

Thank you, Professor, and good afternoon, everyone. We continued our focus on sustainable growth and financial discipline during the quarter. As a result, there was marked improvements across key parameters sequentially, including improved profitability, asset quality metrics, More moderation in slippages, better operating efficiencies, and increasing return ratios. As of Friday, June 2026, a total listener stood at 50,140 crores, considering a healthy year-on-year growth of 23% compared to 40,923 crores last year. Then the same period. Grows of balance grew by 21 percentage, while deposits increased by 19 percentage, reflecting balance growth across both sides of the balance sheet. If we add IBPC transaction done during the quarter, our total business stands at 51,140 costs. On the laboratory side, return deposits remain strong at 91 percentage of total deposits. And cost stood at 23.4%. Our liquidity cover ratio stood at 133.31% as of 30 June 2026, indicating a comfortable liquidity position. Our liability strategy remains centered on granular retail deposits. We continue to deepen customer relationships while improving the quality and stability of our funding base. This remains a strategic priority for us. On the advanced side, secured loan book grew by 35% YOY and now stands as a 62% of total gross advance, whereas the unsecured loan book grew by 16% YOY. The improvement in asset quality is driven by better portfolio mix, stronger underwriting standards, discipline collections, and normalization within the microfinance sector. We therefore believe the current trend is supported by structural improvements rather than temporary recoveries. Secure Group is driven largely by Mark's portfolio, and we saw strong growth in all its major constituents driven by effective execution and tailored offerings across key geographics. Agree growth and mortgage were the standard performers. At 12.992 in Q1-FI27, the MARS portfolio has grown by 42% of the YOY and the 56% of the total portfolio. MARS is not simply a portfolio classification. It represents our strategy to increase equity lending to products, with strong distribution capabilities, local market knowledge, and attractive risk-adjusted returns. This portfolio is expected to remain one of the primary growth engines over the medium term. We have also renewed our focus on the emerging household segment. Emerging household loan consists of displacement to customers who are typically individuals and small entrepreneurs who are progressed beyond traditional microfinance. It caters to customers transition towards greater financial stability and retail banking relationships and who are ready for a broader range of banking solutions. Their annual income is in the range of 3 lakhs to 15 lakhs. And ticket rates in this segment will always be less than 10,000 lakhs. Sorry, 10 lakhs. This segment has been broadly classified into individual In this portfolio, unsecured lending is restricted to individual loans only. All other lending within the segment is secured. This segment has grown 185% YOY and 14% quarter-on-quarter while contributing 22% of total gross advances. Microfront Launch Portfolio Comprising of roof-grown as de-grown, this decline in the traditional roof-mending portfolio essentially consistent with our strategic direction. Rather than assisting customers, we are navigating tangible borrowers in the interior and securing rental relationships under the emerging household framework. This represents customer progression rather than customer attrition. This portfolio transition is ultimately aiming at improving portfolio quality, reducing volatility, and supporting sustainable long-term growth. We are liberating the improving macro environments by adopting a calibrated strategy for growing our MFI portfolio. We have reduced our corporate loans exposure, and we expect them to remain in the current range as we continue to progress our efforts on using the MARG and EH portfolio. During the quarter, we added 70 new banking outlets, and now our distribution footprint stands are a total of 821 banking outlets, 1021 ATMs, 1064 customer service centers, and 31 institutional business correspondence across 24 states and two union territories, enabling deep customer reach and connect. We earned 1.86 lakh new customers during Q1 to reach a total of 1.04 crores customers as on 30th June 2006. We have already mentioned our last couple of calls about ESOP, 00, Patlux, which is our key strategic digital and IT transformation program. It is aimed at strengthening the bank technology backbone, and we have been progressing quite well and outstanding adoption within our ecosystem. We estimate it should be fully implemented by the end of this calendar year. It will bring in the most needed agility in the core business process that will enable quick adaption to the emerging market needs, improves turnaround times, and ultimately enrich customer experience and service. ESOP 2.0 is expected to significantly improve scalability, automation, and operational efficiency. It will enable faster product launches, improve straight-through processing, better customer experiences, and stronger risk control. We believe this technology platform will support the bank's growth over the coming decade. We are coming to further Tengdanda leadership with the committee of Mr. Tengdara Shurla as National Banking and Mr. Massimo Murthy as Chief Risk Officer. These additions add to our government expertise and help us further in building a high-quality, future-ready institution. As we move into the rest of FY27, our priorities remain clear and consistent. We will continue to execute our strategy with discipline. The strongest strengthening of our sector netting franchise, through Mark, creating the emerging asset segment, our financial progression of our financial inclusion journey, and maintaining a balanced approach to growth and risk. At the same time, our investment under WISOP-2000 demands agility, productivity, and customer experience, creating a stronger technology foundation for the future. The improvements in our business performance, asset quality, and profitability reflect structural changes we have made over the last two years, and we remain confident that discipline execution, proven risk management, and customer-centric innovation will enable us to deliver sustainable and profitable growth, while creating long-term values for all our stakeholders. I will now invite our EVP and CFO, Mr. Gris C.P., to take you through the financial performance.

Thank you, sir. Good afternoon, everyone. I thank all the participants for taking time for joining us on this earnings call. Let me give you an overview of our financial performance highlights for Q1SY20 select. As of Q1SY27, total deposits stood at 26,924 crores, growing 19% as compared to 22,598 crores last year, with a healthy CD ratio of 82.3%. Retail deposits increased to 24,487 crores, registering a growth of 13% YOY, which now constitute 91% of the total deposits. Our retail deposits reflect a stable and granular deposit base, which we will continue to build further. Additionally, we are also seeing good traction in our non-resident deposit base witnessing a steady sequential growth for last four quarters. CASA deposits grew at a slower pace than time deposits to 6,297 crores in Q1SI 27, registering a 12% YOY growth with the CASA ratio at 23.4%. Growth advances increased to 23,216 crores from 18,224 crores a year ago, registering a growth of 27% YOY. Our strategic priority of diversifying the loan book remains on track. The secured portfolios deduct 14,465 crore with a growth of 35% YOY, whereas the unsecured portfolios deduct 8,751 crore with a growth of 15% YOY aligned with our strategy. Net interest income improved to 584 crore in Q1-FI27 from 378 crore in Q1-FI26, driven by a healthy loan book growth with a strategic product mix coupled with low slippage number. On the cost side also, we could contain the funding cost by calibrated funding and pricing strategy. Possibly, net interest margin is presently at 7.9% which may moderately come down because of the subdued deficit growth witnessed by the banking system in the recent past. However, we expect that NIM could be kept at a level above 7.5%. Lower cost of funds and lower flip-pages primarily on NSEC ward will continue to maintain improved margins. The cost of operation is also normal and under control and the bank will leverage the increased network for its planned business growth. Reprovisioning operating profit for the quarter of 349 crore is up by 179% YOY. The improvement in PPOP was consistent and promising for the last couple of quarters and is expected to remain stable. This was achieved through progress business growth, appropriated pricing of products, and consistent growth in fee-based income. Other income for the quarter grew by 27% YOY. Operating expenses in Q1 FI27 grew by only 1% QO2 and 8% YOY and cost income ratios stood at 58% as compared to 78% in Q1 last year. We will continue to focus on further improving operating efficiency, enhanced productivity and optimize overhead costs for the remaining year as well. Normalization of in the MI5 sector and the changes in portfolio mix has led to improvement in asset quality and lower slippages. As compared to Q1-FI26, gross NPA for Q1-FI27, Decline to 5.4% from 7.5% and net NPA decline to 0.8% from 3.8% while flickage is reduced sharply to 75 crores from 468 crores on a YOY basis. We have set aside an additional provision of 65 crores during the quarter over and above the RBI norms and voter code policy, and accordingly our provision coverage ratio improved to 86%, but for which it would have been 81%. Cutting cost on annualized basis has 4.4% at-ish, but due to a lower net LPS stock and flipages well under control, we estimate the same will come to around 2% by the year end. Our gross flip-flip ratio for Q1Fi27 on an annualized basis can reduce to 1.4%. Q1Fi27 Profit after track increased sequentially to 80 crores from a pack of 24 crores in the previous quarter. ROA and ROE are reaching normalized levels and stood at 1% and 17.4% respectively on an annualized basis. As business volume continues to scale up by exploiting the operating leverage, From our distribution network and improved technological capabilities, further improvement in the return ratios are expected in future. This marked turnaround has been achieved with our continued focus on strategic transformation through stable business growth, diversified asset growth, disciplined undertakings, improved operating efficiency, and supported by stable microfinance sector. As we enter the next phase of our journey, our priorities remain unchanged, profitable growth, disciplined risk management, operational excellence, and customer-centric innovation. We believe the investments made over the past two years have created a strong foundation for sustainable value creation for all stakeholders. Thank you very much, and now the floor is open for question and answer session.

Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchstone phone. If you wish to remove yourself from the question queue, you may press star and then 2. Participants are requested to use handsets while asking a question.

Ladies and gentlemen, we will wait for a moment while the question queue assembles. Your first question comes from the line of Deepak Potar with Sapphire Capital.

Please go ahead. Yeah, I'm audible, sir.

Yes, sir.

Yeah, yeah. Thank you very much, sir, for this opportunity, and many congratulations for a good set of numbers. So, I just wanted to understand, first up, now on this credit cost outlook that you have given, 2% credit cost by FI27 end, right? And currently, including the management overlay, it was close to... 4.2%, but if you exclude the 65 crores, it would be around 3%, right? So, you expect this additional provisioning, I mean, because given the PCR is already at 85-86%, so coming quarters, you wouldn't need to provide this additional provisioning.

Yeah, our stock of net MPA is only 184 crores as of now. And the last quarter, the slippage number was very meager. At the gross level, it is 74 pros. And at the next level, it is only 40 pros. So that way, going forward also, we don't see any drastic increase in the NPA numbers. So this gives us the confidence that the...

Okay. 2% by FI27. And what does it mean for ROA? I mean, for this FI27, what sort of ROA then we are looking at, given credit cost will decline to 2% by FI27N?

ROA, we expect that it will be 2% by TRN.

Okay. So 2% of an ROA by FI27N, right? Yeah. Okay, okay. And now coming to your other income, I noticed that this first quarter you had 69 crores of PSLC income. So, just wanted to understand, I mean, how is it distributed between the quarters? I mean, you expect this trajectory to continue in coming quarters as well or PSLC income will decline?

It will continue because we are in the growing phase in the priority sector. Normally, the rate of PSLC in the coming quarters will be on the lower side. So, this kind of magnitude may not be there in the coming quarters, but definitely there will be some contributions from that side.

Okay. So, for the entire year, what sort of PSLC income we are expecting to generate?

Maybe around 20 to 25 crores in this quarter, everyone. Good morning, everyone.

22-25 crores in this quarter?

Yes.

Okay, and just one last thing, on FI28 now, I mean, earlier we were alluding to FI28 being a 2% ROA for the entire year. Now we are targeting to achieve by fourth quarter itself this year. So for FI28, then how should one look at FI28 in terms of your ROA?

It is too early to thankfully give a number because, you know, the liability side, how it is shaking up, what are the challenges going forward, what will be the government have, what will be the RBI policy on the rate front, all those things will be dependent on that. But definitely, as we have today, it will be more than that we are seeing in FY27 as per the revised estimate.

Higher than your exit, fourth quarter, I mean, sir, I didn't get you. So, what did you say?

No, we are now, this is Paul Thomas, the MD. So, we are on a growth phase. So, definitely, and we are, if some Totally unprecedented, unexpected things have not happened. We are on the growing pace. I'm not, we are not just, we are not giving you a specific number, but the direction is very clear. About 2, about 2.

Okay, okay, I mean, that's it from my side, I would like to wish you all the very best. Thank you.

Thank you. The next question comes from the line of Amit Mehendale with RoboCapital. Please go ahead.

Thank you. Hi. Thank you, sir. My first question is on the effective tax rate for FY27 and FY28. I mean, considering that we have had losses in the past, what do you expect the effective tax rate to be?

Effective tax rate will always be around 25.5.

So, we will have some DTA to offset, right?

Yeah, DTA will be there, yes.

So, you still expect 25% of taxes?

Yeah, because, you know, the DTA impact will come only on the cash outflow on the taxes, etc. But, the effective tax rate is after taking, because we have recognized the tax gain on loss during the last year itself.

Okay. Right. And so in terms of capital, do you plan to raise any tier one capital in FI27?

See, our CRIR is very comfortable now. We have a 23% to 24% CRIR is there. But depending on our long-term strategy, we also have to bring down the promoter holding to 26% by 2031. So, as the market conditions improves, we are exploring.

Right, sir. I mean, is it fair to say that you are exploring in the next two, three quarters, or will it be an effort 28?

As per the Catholic plan, you know, we are growing around 25 percentage minimum growth. And with the ROE is coming around 17% to 20%, definitely growth capital requirement is there. And during the last two years, we were infusing Tier 2 capital because the price levels were not conducive enough for raising Tier 1 capital. And as MD was expressing, the promoter stake also has to come down by 2032. So, keeping all these in mind, if the price level comes at the appropriate level, we may hope for raising PR1 capital by the end of this year.

Right. And what type of price-to-book multiple are you comfortable when you dilute the stake? Is there any broad guidance like 1.5x or 2x, any price-to-book ballpark number?

We have noted that we have started those discussions.

Anyway, you know at what price we have raised, you know, IPO, and also before that also we have taken some round of price placement, etc. So keeping all the sentiments of the existing investors, we will take a call at the appropriate time.

Right, sir. And my last question is on ROA. Like, you know, three, four years out, three, four years, you know, like, what do you see as a steady state ROA for the business? Because our, you know, secured book has now, you know, expanded significantly. And how do you see it as a, you know, business on a steady state basis?

On the ROA, I have already given, even in 28, you know, it is too early to predict. But on a steady state ROA, I think 2 to 2.5% will be a good guess. Given, you know, the growth rate as well as the expense which is additionally required for the security, for the, you know, investment in IT, technology, spread, all those things we will have to keep into account. And 2 to 2.5% will be a comfortable level of ROA going forward.

Okay, sir. Thank you very much. That's it for mine.

Thank you. Before we take the next question, a reminder to all the participants, you may press star and then 1 to ask a question. The next question comes from Rishabh, who is an individual investor. Please go ahead.

Hello, am I audible?

Yes, sir.

So my question is, as per your investor presentation, 71% of total deposits are from Kerala. So how you plan to diversify this pool?

We already have a very good build over the last couple of years. We built a branch network across 26 days. So, that's why we said that during the last two years, because of the asset quality issues and all, we couldn't leverage on that branch network we built. So, we will be, now we started building the, leveraging the network. So, we have good network across the region. So, branch network is there. So, we'll be doing that.

And so, secondly, what is your take on further branch expansion? I mean, any guidance for next three to five years?

Branch expansion?

Yeah, we have, for this year, we have planned, we

have planned 50 branches out of the 17 is already opened and operationized, and then Space Manager will be opening the rest of things.

Most of these new branches will be offered in these newer geographies where we have started the last couple of years.

And, sir, which kind of locations you'll be focusing? Is it metro, semi-urban or urban?

Mostly semi-urban and rural because, as you all know, that 25% of our branches has to be in unbanked rural locations. So, we have a regulatory requirement to meet that. So, rural, semi-urban, and then few branches in metro also be there.

Okay. Okay, sir, that's all from my side. Thank you, and all of us for the upcoming quarters and years.

Thank you. Thank you very much.

Thank you.

Thank you. The next question comes from the line of Sebin Joy with an individual investor. Please go ahead.

First of all, congratulations on the results. It looked great coming back from our times when we had losses in the previous quarters. My question was mostly on the gold loan portfolio. When I look at it as an overall, it's 42% of our loan portfolio. Are we planning to keep this at this range? And the follow-up question on that is, what is the approximate LTV value on these loans? Are we lending out to the maximum regulatory possible limit, or are we keeping an internal buffer on those?

Yeah, so we will be your first. Thank you, thank you, Stedin, and we will be continuing at almost this level, 40 to 45 percentage. We'll be continuing, and our overall book level LTV is at 72 percentage, 72 percentage. We are not going for the upper limit, always.

Yeah, that sounds prudent. Yeah, I just had that question. Thank you and congrats on the result. Thank you. Thank you. Thank you very much.

Thank you. A reminder to all the participants, you may press star and then one to ask a question. The next question comes from the line of Ankur. An individual investor, please go.

Hello. My question is on the credit guarantee scheme. Three of the competitors I've noticed have got 500 pros plus recovery from such scheme. If I can name them, it's IDFC Bank and Suryodha Bank. So I wanted to know if our microfinance book was covered in this scheme, and if not, what was the business national for that? And if it's covered, how much recovery are we expecting?

On the PCFMU, we have not covered our micro-banging portfolio because traditionally the delinquencies are very low on that book. And as a conscious call, we have not taken so far. So going forward, having experienced this kind of delinquencies in the past, we will be taking a call going forward.

Okay. And my second question is on the disbursement for the quarter was 8,500 plus, which is significantly lower Q on Q basis. So just wanted a color on this.

So, we'll be keeping that same phase. Now, when compared to this quarter, we have a much better dispersion happens, considering the industry as a whole, how we're improving all segment. So, we expect that we'll be keeping that same line.

So, I was asking Q on Q. So, basically, if you look at from March quarter versus June quarter, this investment has come down. Yeah, normally. In the previous year, if you compare March quarter and June quarter, there was an increase in disbursement.

Yeah, last year, you know, the gold loan, the prices were going up in a unidirectional way. So, that is not the case now. So, people who are pledging the gold loan, which is typically for a one-year loan, which we are giving them, but most of the people were, you know, because of the additional funding requirements, the same amount of gold, they will be, you know, Re-pledging the gold for getting a higher amount or getting a partial release of the loan by way of closing and booking a fresh loan. So that intensity has come down during the year because of the price correction which has happened in the recent past. So, that is one of the reasons why the disbursement is on the lower side.

Okay. So, going forward, but on an even basis, we expect 25-20% growth year-on-year basis. That would be right assumption.

Yes.

See, growth, we have given the, you know, guidance only to the extent of 22-25% on the asset growth. So, with the current level of disbursements, we are confident of achieving those kinds of numbers.

Thank you, thanks a lot.

Thank you. Participants, if you wish to register for a question, please press star and then one now.

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

So, thank you very much for all for participating in this call. So, we believe we have taken the right strategic steps and the improved performance validates the same. We will continue. With the same dedication and hopefully supported by a positive micro environment, we can expect to see continued growth in the coming quarters. So thank you all, all the participants, investors and analysts for taking the time out for this conference call today. In case you have any follow-up questions or inquiries, you can always reach out to our investment relations team. Thank you very much.

Thank you, all the members of the management. On behalf of ESAF Smalls Finance Bank, that concludes this conference. Thank you, everyone, for joining us, and you may now disconnect your lines. Thank you.