Ladies and gentlemen, good day and welcome to the AU Small Finance
Bank Q2’FY27 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, then zero on your touchtone phone.
I now hand the conference over to Mr. Prince Tiwari, Head of Investor
Relations and FIG, AU Small Finance Bank. Thank you, and over to you,
Sir.
Prince Tiwari:
Thank you, Rutuja, and good afternoon, everyone, and welcome to AU
Small Finance Bank's Earnings Call for the second quarter of financial
year '26-'27. We thank you all for joining the call this evening. On
today's call, from management, we have our founder MD and CEO, Mr.
Sanjay Agarwal; our Executive Director, Mr. Vivek Tripathi; our CFO, Mr.
Gaurav Jain; and IR team.
CFO sir will start today's call with 15 to 20 minutes opening remarks
highlighting the bank's performance, positioning, and outlook. We'll
follow the opening remarks with a 40 to 45 minutes of Q&A from
participating investors and analysts.
For the benefit of all participants and so that we can take everyone's
questions, we would humbly request everyone to keep the number of
questions restricted to two per participant and join back in the queue
in case you have further questions. For any data keeping questions, you
may kindly reach out to the IR team anytime post this call.
With that, I now request Gaurav to share his opening remarks.
Gaurav Jain:
Opening remarks: Q2 FY27 earnings call
Thank you, Prince.
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AU Small Finance Bank Limited
October 24, 2026
Good evening, everyone, and thank you for joining us for our Q2 FY27
earnings call.
Q2 was our 38th quarter as a commercial Bank and over the past
decade, we have navigated a dynamic operating environment while
strengthening our balance sheet, building multiple growth engines,
investing in technology and talent and maintaining a sharp focus on risk
management and governance.
Q2 was another quarter where the Bank demonstrated resilience and
strong operating performance amidst a challenging macroeconomic
backdrop. The operating environment in this quarter continued to be
influenced by geopolitical risks and monetary policy tightening with
MPC raising policy rate by 25 bps to 5.5% and shifting stance to
“Calibrated tightening”. While domestic activity and credit demand
remained healthy, we remain watchful of the implications on liquidity,
deposit pricing and loan yields.
Now let me walk you through the key highlights of our performance in
Q2.
Our deposits grew strongly by 29% YoY and 8% QoQ (vs banking system
growth of 18% yoY). This was despite not meaningfully participating in
the strong FCNR inflows in the banking system due to our limited
overseas footprint. We garnered around US$230 million of FCNR
deposits on a gross basis in Q2. CASA deposits continued to see strong
growth at 29% YoY and 11% QoQ with CASA ratio sequentially
improving 72bps to 29.5% from 28.8% in Q1
Loan portfolio grew 25% YoY and 7% QoQ, against banking sector credit
growth of 19%. Secured assets, which remain the foundation of our
lending franchise, grew by 26% YoY and 5% QoQ. Unsecured businesses
grew 23% YoY and 8% QoQ led by microfinance and personal loan.
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Disbursement for the quarter was up by 33% YoY, driven by broadbased growth across businesses.
This balance-sheet growth translated into healthy operating
performance. Net Interest Income increased by 32% YoY on the back of
strong growth in loan portfolio and 33 bps YoY expansion in margins.
Sequentially, margin declined by 9 bps to 5.8% driven by higher share
of investments to total assets and seasonality. Sequential loan spreads
remained broadly stable with decline in loan yields (by 9bps) being
offset by 7 bps decline in cost of funds. Core fee income grew by 16%
YoY driven by healthy business volumes. Treasury profits were lower
on a YoY basis leading to muted total other income growth of 8% YoY.
Operating expenses increased by 26% YoY driven by growth in
disbursement volumes and continued investments in distribution,
brand and technology. Operating leverage continues to play out on
underlying basis, with Cost-to-assets ratio, excluding guarantee
premium, improving from 4.0% in Q1 to 3.9% this quarter. We expect
cost to assets ratio to improve YoY on a full year basis.
Core PPoP grew by 31% YoY to INR1,480 Cr whereas provisions declined
by 25% to INR359 Cr, largely led by normalization in unsecured
businesses. Asset quality metrics remained stable during the quarter.
Slippage ratio improved on a YoY basis to 2.6% vs 3.3% a year ago
supported by improvement in unsecured businesses, while slippages in
the secured assets remained stable. GNPA ratio declined by 42bps YoY
to 1.99% and Credit cost, including guarantee premium, declined by 45
bps YoY to 0.8%
Profit after tax grew 53% YoY to INR858 Cr compared to INR561 Cr in
Q2’FY26. RoA for the quarter improved to 1.7% vs 1.4% in Q2 last year
and RoE improved to 16.1% vs 12.4% in Q2 last year. For H1’FY27, Profit
after Tax improved by 45% YoY to INR1,654 Cr compared to INR1,142
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October 24, 2026
Cr in H1’FY26. Similarly, RoA and RoE improved to 1.7% and 15.8%
compared to 1.4% and 12.9% for same period last year.
In terms of other strategic updates, We continue to invest in our
people, distribution, branding and technology, to strengthen our
foundation for the next phase of our growth. During the quarter, we
added ~2,400 employees largely in customer facing roles to support
our increased distribution with 45 new deposit branches and 100+
asset centres added in Q2. We also strengthened our senior leadership
team, with Mr. Anil Agarwal joining as Senior Executive Group Head, to
lead our Commercial & Institutional Banking business and Mr. Amol
Padhye formally assuming the role of Chief Risk Officer. We have also
stepped up our brand investments across television, print and digital
media with association with Kaun Banega Crorepati being a prominent
investment. This month we also inaugurated our new corporate office
in Mumbai, marking an important milestone in our journey. In the next
few months our entire senior leadership will be co-located in this office,
bringing us even closer to the broader financial ecosystem. In terms of
our credit rating, on 1st October, ICRA Ratings upgraded our credit
rating outlook to Positive from Stable, while re-affirming our long-term
rating at AA.
Coming to our Technology and AI initiatives. As announced last quarter,
our Tech strategy is organized across 3 pillars of Run, Build and
Transform with dedicated teams and leadership for each area. Run and
Build capabilities are enabling the Bank to scale faster while serving
customers more intelligently, at lower cost and in uniformity.
Transform pillar is focused on ensuring AI adoption at scale and moving
AI from individual use cases to an enterprise operating model. Our
deterministic, agentic AI platform is a framework of responsible AI,
human-in-the-loop governance, model explainability, full auditability,
zero-trust security with real-time risk monitoring.
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This enterprise-wide automation is driving straight-through processing
and cross-sell. Our investments in data lakehouse and analytics
platforms have started to show some traction. For example, our Cross
Lead Platform, together with Voice AI, enabled ~5% of our total
disbursements in Q2; Importantly, this automated customer coverage
led to ~50% operating cost savings Voice AI led disbursements.
Additionally, the score card-led underwriting models delivered ₹500
crore+ disbursements in unsecured loans during the quarter. Agentic
AI LOS for Gold Loans is showing promise with over 2,500 loans
disbursed till date delivering faster turnaround times and superior
customer service across 40 branches. Increasingly, the Bank is focusing
on scaling Agentic AI journey to Wheels, Mortgages and Commercial
Loan while redesigning 5 priority back-office and control functions as
AI-native workflows. Overall, our technology investments remain
focused on delivering measurable business outcomes while creating a
scalable
foundation
for
sustainable
growth
and
long-term
differentiation.
Now, let me now provide some colour on our key businesses, starting
with deposits. Our liability franchise is classified under two broad
verticals - Branch Banking and Commercial & Institutional Banking.
Branch Banking forms 61% of our total deposits and focuses on
relationship led customer acquisition and servicing. Commercial
&
Institutional Banking now comprises of all other deposit verticals like
Government Banking, Commercial and Wholesale banking and FIG and
capital markets where the mandate is to build a stronger current
account-led
deposit
franchise
through
deeper,
solution-led
engagement across transaction banking, cash management, forex and
institutional banking.
In Q2, total deposits grew 29% YoY supported by strong growth of 55%
in CA balances and 23% in SA balances. On a daily average basis, CA
balances grew 61% YoY whereas SA balances were up 24% YoY. New
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CASA account acquisition during Q2 also remained strong with 45% YoY
growth in acquisition of premium accounts. During the quarter, Bank
also received SEBI approval for providing UPI Sponsorship Services
under the ASBA framework for IPOs and Public Issues. This will
strengthen our Capital Markets and Transaction Banking proposition
and help Bank position itself as “Banker to an Issue” for public market
issuances.
This strong deposit performance reflects several strategies coming
together: sharper segmentation, dedicated liability channels, wider
distribution, stronger brand and an improved customer proposition.
These capabilities built over several years are now translating into
stronger acquisition and more granular, broad-based growth. We are
encouraged by the progress but remain focused on sustaining it with
the right mix, pricing discipline and quality of deposits
Moving on to our assets franchise. Retail secured assets, comprising
Wheels, Mortgages and Gold Loan, forms 66% of our portfolio and
grew 22% YoY and 5% QoQ. Within Retail, Wheels book crossed the
50,000 crore milestone this quarter and grew 27% YoY and 6% QoQ to
reach ~51,000 crore; growth was driven by strong demand in the new
vehicle segment as well as increasing disbursement traction across
newer geographies. Gold loan business grew 102% YoY and 4% QoQ to
~4,700 crore. Mortgages business, comprising Micro business loans
and affordable housing, grew by 12% YoY and 2% QoQ with growth
largely being led MBL business where disbursements are up 17% YoY.
As mentioned in the past, we are not looking to chase affordable
housing loan growth, given our cost of funds and the competitive
intensity in the segment.
Moving on to Commercial Banking. This business grew 39% YoY and 8%
QoQ to ~₹35,300 crore, with broad-based growth across sub-verticals.
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Transaction-banking and forex income grew by 51% YoY, reflecting
improving product penetration and stronger customer engagement.
With growth remaining robust, focus in commercial banking is to
become progressively self-funded with every lending, supply-chain,
and corporate-banking relationship having a Current account, CMS or
collections, and payments proposition attached.
Now moving on to Unsecured businesses. Our Inclusive Banking
franchise, which primarily includes MFI, grew 23% YoY and 6% QoQ.
Collection efficiency was stable at 99.6%, and 99% of the book is
covered under the CGFMU guarantee scheme. Our digital unsecured
portfolio also reported a strong growth of 23% YoY and 14% QoQ.
Personal loans grew by 81% YoY and 31% QoQ off a low base,
supported by analytics-led cross-sell and calibrated new-to-bank
acquisition. The credit card book saw marginal growth, with 1.5 lac new
cards issued in the quarter.
To conclude, Q2 reflects continued progress across our deposit
franchise, lending businesses and profitability. As we look ahead, our
focus remains on building the institution ahead of its scale by
strengthening governance, leadership and organisational capabilities,
while simplifying processes and leveraging technology, data and AI to
improve customer experience and productivity. While we remain
watchful of the operating environment, the investments we have made
in our businesses, teams and distribution provide us a strong
foundation to pursue growth with discipline, granularity and
consistency. We remain confident in our ability to compound
sustainably, deliver predictable performance and create long-term
value for all our stakeholders.
I would like to thank our teams for their commitment, and all our
stakeholders for their continued trust in us. With that, I will now hand
over to Prince for Q&A.
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October 24, 2026
Prince Tiwari:
Thank you, Gaurav. Rutuja, we can now open the floor for questions
and answers.
Moderator:
Thank you very much. Ladies and gentlemen, we will now begin the
question-and-answer session. The first question is from the line of
Akshay Jain from Autonomous. Please go ahead.
Akshay Jain:
Hi, sir, and thank you for the opportunity. Sir, I have two questions.
First, on your margins. I can see that margins have declined by 9 basis
points quarter-on-quarter and you have attributed higher investments
as the reason behind it.
So, my question is on this liquidity. You have seen a deposit growth of
8% QoQ and even if we adjust it for FCNR, it is strong at 6.7%. What's
driving this strong deposit growth? Is it some one-offs, or is it because
the larger banks have vacated the domestic deposit space for FCNR (B)?
What should be the sustainable deposit growth incrementally, and also
the margins?
Prince Tiwari:
Hi, Akshay. Prince here. Thank you for the question. I think on our
overall deposits, we have been commenting for some time that as a
Bank, we have been investing heavily both in our distribution as well as
technology and getting processes right, getting to make it easier for the
customer to onboard themselves to bank with us.
What you are seeing is net-net a result of that. I don't think there is any
one-off there. There could definitely be some transactional current
account flows which came through this quarter, but I would not say it's
a one-off. It's something that we have been working upon as a bank,
and we have started to see some bit of result of that, and that's why
you see the CASA ratio in the quarter going up by almost 70 basis points
on a quarter-on-quarter basis.
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And I think if you recollect, our public guidance has always been that
our deposits will continue to grow faster than or in line with our loan
growth. On our loan growth, given that this quarter we didn't have any
FCNR component, loan growth has been at about 25% on an annual
basis, and deposits have just followed that. There's nothing specific to
call out there, I would say. It's more the granular work that the team is
doing, and that makes us a lot more confident going into this next cycle.
Akshay Jain:
Sir, but what should be the sustainable deposit growth? Should we
assume the current run rate of say 26%, 27% as sustainable, or should
it cool down a bit incrementally? And even on the CASA front?
Sanjay Agarwal:
Yeah, Akshay. Sanjay Agarwal this side. The whole endeavor of
organization is just to look for a sustainable deposit growth, right? And
we've already commented that we want to relate it with the overall
nominal GDP growth of the country, and there if the country is growing
this year in the range of 10%, then we are expecting around 25% plus.
This year-on-year 29% growth can be a little bit more than what we
expected, but I think the whole architecture of building our deposit
franchise has been really clearly laid down in the organization. We have
a retail branch banking franchise, we have a commercial banking
franchise, government banking franchise. So, overall, we believe that
for the last 9 years now, 38 quarters, we really have worked every day
on our deposit franchise, and now it's a time when it's really paying in
for us.
Prince Tiwari:
Yeah. And also if I can add, Akshay, if you see the average balances, I
think we have given the daily average balance also for current account
and savings account, I think Gaurav covered it in his speech, on a Y-o-Y
basis, you are seeing both current accounts growing at about 60% on
an average basis, and savings account also growing 24%. That also tells
you that this is more transactional money rather than any one-off.
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Sanjay Agarwal:
Our target is to grow in the range of 25% year-on-year. But it will
depend on the market and the overall condition. But we are very happy
to see our growth irrespective of not doing so well in our FCNR
deposits.
Akshay Jain:
Understood, sir. And second question is on asset quality. This quarter
has been pretty robust on asset quality, but what would be the outlook
on asset quality, given the El Niño and the uncertain macro? Plus, many
of your peers have warned of the impact of drought, especially in
certain regions in Central India. How should we expect asset quality to
behave incrementally, and any change to credit cost guidance?
Sanjay Agarwal:
Yeah, Akshay. Of course, there are lot many vulnerabilities which we
are all going through, but the silver lining is this that our six-monthly
credit cost is around 73 bps or 74 bps (81 bps including CGFMU
premium). We have given a guidance of close to 90 bps, so we have
enough room for any kind of vulnerabilities or one-off. Largely, some
of the districts or states might be facing challenges due to drought or
high oil prices, but the data has not shown any kind of stress till now.
Yes, fingers crossed. Let's see how quarter three behaves because
whatever will be there will come in the quarter three. I do not expect
any surprises in quarter four, to be honest. Vivek, you want to add on
something?
Vivek Tripathi:
Yeah, so largely, what do we anticipate, right? So far, till September,
everything has been in line and what we anticipate that we would be
within our guided range. So we do not anticipate that we will be
reaching it (guided credit cost). In terms of product also, I would say
one of the most vulnerable products (MFI) has a very wide coverage
now. 99% of that book is covered under CGFMU, so we do not worry
that much.
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Akshay Jain:
So, sir, is it safe to assume that your SMA levels as well as the collection
efficiency are still pretty robust, and we are yet to see any deterioration
over there?
Vivek Tripathi:
Absolutely. Yes.
Akshay Jain:
Thank you, sir. Those are my questions.
Prince Tiwari:
Thanks, Akshay. Thank you.
Moderator:
Thank you. The next question is from the line of Jayant Kharote from
Axis Capital. Please go ahead.
Moderator:
I am sorry to interrupt you, Mr. Jayant. We are unable to hear you.
Jayant Kharote:
Hello. Am I audible now?
Moderator:
Yes.
Jayant Kharote:
Yeah. Congrats on the good set of numbers. First question is on
slippages. If you could help us understand which segments have seen
inch-up Q2 versus Q1 in terms of slippages? That is first question. I will
come back with my second.
Vivek Tripathi:
Jayant, both Q1 and Q2 sequentially is not comparable. Typically, it's
not apple-to-apple comparison. To have a right comparison, you have
to compare it with the last year Q2 because tractor is a one product
where you have a billing cycle twice in a year, right? This quarter, you
had tractor billing, and tractor billing will have a little bit of impact on
your overall slippages, right?
So, it has seasonality because it's linked with crop cycles. I would say
that if you look at the improvement area from last couple of quarters,
that has largely been from the unsecured side. Our credit card and
microfinance franchise has stabilized and is absolutely in pretty shape.
On the secured retail asset or commercial asset, there has never been
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a challenge for us, right? That's always has been range-bound. We do
not see any sort of reason to ascertain that any change in the slippages.
It's more of seasonal and more of a tractor billing. Yeah.
Jayant Kharote:
Understood. Sir, you can continue, if you want, or I can go on to the
second one.
Prince Tiwari:
No, no. Go ahead, Jayant. Next question.
Jayant Kharote:
Okay. Second was the insurance fee income impact, right? While there
is some ROA impact to that tune, we have been guiding for this 1.8%
ROA outlook consistently. Given that this could be maybe 7, 8 basis
points of impact, what levers do you have to ensure that our ROA/ROE
profile remains stable going ahead?
And why I am asking this is, as I can see, you are shoring up deposits or
liabilities as you scale up, that is going to weigh on your NIMs, right?
And probably a right strategy to invest on the liability side from the
medium-term perspective. But then how do you manage the ROA
profile with this surplus liquidity on the deposit side continuing for the
next 2-3 years, and then that insurance hit coming?
Gaurav Jain:
Yeah. When you speak about the ROA outlook for in the sort of, say,
medium term, right? Clearly, there will be some headwind from this
insurance fee income consultation paper, right? It remains to be seen
what is the final shape in which this is ultimately passed, but
irrespective of that, there will be some impact, right? What I want to
add is there are other line items within the other income line which are
growing on a secular basis. We have forex business, which we started
a couple of years back.
That is gaining quarter-on-quarter. We also have credit card issuances
bouncing back, so that is also aiding sort of my other income fee pool.
We are also growing our trade finance business, right? There are other
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fee pools which will help offset some of the headwinds from the
insurance side of things, right?
In terms of other components of the ROA tree, we have been discussing
extensively the operating efficiency as a key driver on a multi-year
basis, right? When you look at our cost-to-assets ratio of about 4%, that
compares with other mid-sized banks who are operating between, say,
2.5 to 3.5. I feel confident that on a multi-year basis, we should be
looking for sequential improvements on this, despite sort of continuing
to invest in our in our franchise, right?
Then on credit cost, we have said that long term, you should expect 90
basis points to 100 basis points of credit cost on a through-the-cycle
basis. That will depend on how each year is playing out. Those are some
of the key drivers.
And the final one, again, I don't want to comment on quarter-onquarter, but we have a deposit franchise which is gaining momentum
and traction with each passing quarter, right? Prince spoke about, and
I mentioned in my opening remarks, how we are adding propositions
which are for differentiated segments, how we are investing in our
distribution, in our technology, and in our brand, right?
So my deposit franchise will improve, which should help me lower the
cost of funds differential versus other peer mid-sized banks over a
medium-term outlook. I think those are some of the things which will
help, right? These are some of the known things which we think we
should have.
And then there's always, you know, there are stuff which comes out of
the woodwork both on the negative side and positive side, so we
remain hopeful that there are other stuff like the UPI MDR income line,
etcetera, which will start to come into play, so multiple things to offset
this.
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Moderator:
Sorry to interrupt. May we request Mr. Jayant to please rejoin the
queue? We have other participants waiting for turn. Thank you. The
next question is from the line of Kunal Shah from Citigroup. Please go
ahead.
Kunal Shah:
Yeah, hi. Thanks for taking the question. So particularly on the deposit
side, from two contexts, one is, we have grown at a pace faster at
almost 28%-29%-odd, and other banks are flushed with liquidity from
FCNR. So what would be our deposit rate strategy?
Would we continue with this 80-90 basis points of premium on the
term deposit side? Or given that other banks would not be very
aggressive? Would we look at tweaking the deposit rate? What would
be our deposit rate strategy in the current environment?
Sanjay Agarwal:
Hi, Kunal. Sanjay this side. So, I think 80-90, or maybe 100 bps premium
to other banks, we want to be on that strategy only, because we
haven't seen any rates coming down because of FCNR deposits, and it
was largely on the I would say wholesale deposits where some cut
happened. And we also calibrated ourselves, and that is why our cost
of money for Quarter 2 has come down, right?
So in a larger sense, we need to build our deposit franchise, and we
need to build with some kind of price, and that we really want to be
like this till we get a new platform and we settle on the new platform.
So I think deposit franchise remains our top priority, and we will not
play around with market-driven forces or events. Rather, we want to
be on our own path and create more and more customer and treat
them holistically, or serve them holistically, so that in a long run, our
franchise becomes more stable and sustainable.
Kunal Shah:
Okay. So in rising rate, if other banks don't react in terms of increasing
the rates, we might still react looking at maybe our growth profile and
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maybe our strategy which is there? We will not be more marketdetermined?
Sanjay Agarwal:
No. I won't say -- I'm not saying this. I'm just saying this because we’ll
have our strategy, which is always based on some market data and all
those things, but it's not driven by not many optics number, right?
Whether we are pricing 100 bps more or we are pricing with some
other or you know, it's our own strategy where we want to raise our
money. So that will continue.
If money becomes expensive, we need to build our deposit franchise
around that. But our deposit franchise is now becoming more and
more, I would say, visible, it's gaining traction. We are building our
franchise more in sense that people are trusting us and knowing us
more and more. So the cost of acquisition and effort in acquisition is
now going down.
So that's the way I'm explaining that, what we have done around
deposit franchise is one of the example where how we can calibrate
both, the cost and the growth. So it's a balance of both, right? So let's
not read too much. And I would say, we go along with the requirement
of the business.
Kunal Shah:
Got it. And secondly, on opex-to-asset, so this quarter again we saw
quite significant jump on opex side, 7% quarter-on-quarter, and when
we look at overhead costs, that has gone up by almost like 11%-odd
quarter-on-quarter, 35% year-on-year.
So currently, it's still in line with the overall AUM growth, and we keep
talking about the opex efficiency. So when should we actually start
seeing this efficiency? I understand we have added branches, added
employees over past couple of quarters, but when ideally this
operating efficiency would start to play?
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Gaurav Jain:
So look, there are two impacts, right? When you look at the 25% yearon-year increase in cost, right? So there is an underlying cost which is
supporting the existing business, and then there is investment which is
going to improve the platform, be it through technology, distribution,
or branding.
So the 25% is a net result of that, right? But if you look at on a cost-toincome ratio or a cost-to-assets ratio, we are either stable or improving
on that. On ROA tree basis, I think we improved on a Y-o-Y basis when
you look at Q2 numbers.
Kunal Shah:
Okay, got it. Okay, yeah, thanks. Thanks for answering the questions.
Yeah.
Moderator:
Thank you. Next question is from the line of Nitin Aggarwal from Motilal
Oswal. Please go ahead.
Nitin Aggarwal:
Yeah, hi. Thanks for the opportunity, and congrats on good results. I
have two questions. One is on the gold loan growth. Like, we have been
earlier reporting pretty strong growth, 100% plus, but this quarter is a
little outlier in that strong growth context. So, anything to read into this
from this quarterly growth perspective?
And second is again, going back on the margin. In general, there has
been a concern about the fixed-rate nature of the bank and how the
rate cycle is playing out. So what levers do we see to maintain margins?
And is there any risk that we are looking at that can play out on the
margins if the competition for deposit tightens going further? And
because the book will take some time to reprice, how is the
management looking at that?
Prince Tiwari:
Nitin, I’ll maybe first comment on margins, and then ask Sanjay ji to
comment on gold loans. So margins, I think, if you see our margins this
quarter, the loan spreads have been similar, right, if you compare
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quarter-on-quarter basis. While the cost of funds have gone down by
about 7 basis points, we have also seen some decline in the yields
because of the mix change, right? That's what we had articulated last
time as well.
So, I think the larger part of the NIM decline has been coming from the
higher liquidity that we have maintained, or basically the higher
investment book that we have run as a percentage of total assets. And
then there have always been the day count impact, which keeps
altering between quarters. This quarter, I think there was an extra day
count, so that had impact of 3 basis points, 4 basis points, right?
If I look forward, there are a couple of key components to the NIM. One
is obviously on the cost of funds. On cost of funds, as we articulated,
this quarter the cost of funds benefited from transactional current
account balances which had gone up significantly.
As somebody else said in the call earlier that the system liquidity is
drying up, from the FCNR there was a lot of system liquidity, that also
helped. That has started to dry up and the rates have started to go up.
Especially in the short term, you can clearly see rates going up. This
probably will put capping in terms of further improvement in our cost
of funds.
Going forward, it will be more a function of liquidity and deposit
competition which will determine the trajectory of cost of funds. I
think, Kunal, to your earlier question that we peg we pegged our cost
deposit cost to the mid-sized banks. If they react, we will necessarily be
forced to react, given the platform disadvantage that we currently
have.
Now, as far as the yield of advances is concerned, I think and that was
your question, that ~30% of our book is floating rate and 70% is fixed
rate. So this 30% floating rate book, the recent repo hike that has
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happened of 25 basis points, that'll get transmitted over the next 3 to
4 months. Typically takes about 3 to 4 months, or one full quarter, so
full impact will be visible next quarter, but it will start happening from
this month onwards.
In case any future rate hikes happen, then that will further go on to
support the yield on this 30% of the book. As far as the 70% of the book
is concerned, which is fixed rate, I think there we'll have to just go with
the market, and if there could be any pick up in the disbursement yields
in the market, then I think that should start reflecting at our end as well.
We'll follow that competitive pressure.
Otherwise, it's a function of what the asset mix is going to be, and as
you know that this time, I think unsecured book is also available to us,
which was not really there last time, and it has started to come off the
cycle and started to do well. So, if you ask me a very point-blank
question that are we better prepared compared to the last interest rate
cycle, the answer is yes.
And why I say that? I say that because of two or three reasons, and I
think we talked about some of them in the call. One, the overall the
floating rate book, which is now 30%, provides some cushion. Second,
if you look at the deposit rate tenure itself, what we have done is we
had elongated our deposit rate retail deposit tenure, the peak rate
from 18 months to 36 months. So that should also help.
But the biggest point that I want to highlight, or the second biggest
point, is the interest rates in the system haven't gone down to the
extent the repo rate cut has happened. If you look at the last three
quarters since December quarter last year, even though the RBI cut the
repo rate by 125 basis points, the deposit rates haven't really reacted
that strongly. And we do believe that when the rates start to go up,
probably some of that is already baked in into the market pricing.
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And the last point, I think as a deposit franchise, we are in a much
better position than we were in 2022 when the last interest rate cycle
kicked in. The franchise is much bigger, we are investing in our
branches, we are a pan-India franchise and obviously, there could be a
tailwind from the platform transition as well. I would say all in all, we
do think that we're in a much better position to traverse this NIM cycle
as compared to where we were last time.
Nitin Aggarwal:
Got that. Thanks for such detailed explanation. And second question
was on the gold loans.
Vivek Tripathi:
Yeah. Hi, Nitin. Vivek here. On Gold loan, if I have to just look at the
year-on-year growth, it is pretty strong. More than 100%, though we
are starting from a very small base. It remains a highly attractive
franchise for us, and there is a whole lot of distribution available as for
now available to us to grow this book.
Whatever moderation we are seeing in the near term is just because
it's a reversal of gold loan prices, which has impacted two things: one,
the renewal, the second, the BT portfolio from the industry. I don't
think that we have to read too much into it.
There is a whole lot of distribution which is available for us, and our
focus remains on this product where we see that we have a strong
headroom for growth available to us to grow this book. We'll continue
to keep on investing in the distribution of this product.
Nitin Aggarwal:
Right. And Vivek, possible to share any color around the LTVs in this
product?
Vivek Tripathi:
LTVs remains range-bound. There is a proper mechanism if there is a
breach happens of the margin call, etcetera. So it's well-defined. At a
portfolio level, it's about 75%, and that that remains, which was there
in the last quarter, which is there in this quarter. So there's hardly any
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difference. But what it does, if the metal prices are not increasing, the
opportunity for you to renew that customer, or take the top-up loans,
or do a BT from somewhere else, reduces, and hence you're seeing
industry-wide little slowdown, right?
Nitin Aggarwal:
Got that. Got that. Thank you so much.
Vivek Tripathi:
Thanks, Nitin.
Moderator:
Thank you. The next question is from the line of Ashlesh Sonje from
Kotak Securities. Please go ahead.
Ashlesh Sonje:
Hi, team. Good evening. A few questions from my side. I'll just list them
out here. Firstly, on the CASA deposits, the bank has seen a very
commendable acceleration in the last few quarters.
Prince Tiwari:
Sorry. Ashlesh, can't hear you properly. Can you just pick up the
handset?
Ashlesh Sonje:
Yeah, I'm just listing out a few questions. Firstly, on the CASA deposits...
Moderator:
Sorry to interrupt you, Mr. Ashlesh, but your voice is breaking in
between.
Ashlesh Sonje:
Okay.
Moderator:
We would request you, Ashlesh, to please come in a proper reception
area. And if you we would request you to please rejoin the queue
because we are unable to hear you, sir.
Ashlesh Sonje:
Sure, okay. I'll do that.
Moderator:
Thank you. In a meanwhile, we'll move to the next participant, Mr.
Piran Engineer from CLSA. Please go ahead with your question.
Piran Engineer:
Yeah, hi, team. Thanks for taking my questions and congrats on the
quarter. Just going back to one of the earlier participant’s question. I
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understand slippages can be seasonal, and you should not compare Q1
with Q2. But if I take this year's 2Q and I compare it with, before MFI
crisis, let's say 2023 or 2022, it is still slightly higher. Now, again, is there
something to read into it? Is it just transitory? How do we read this,
especially in an environment where all banks are reporting very low
slippage numbers? How do we read this?
Vivek Tripathi:
I think the comparison of 2022 when you're coming out of COVID, a
very different cycle where most of the NPA is already recognized, and
then the acceleration of the asset quality happened. This is very
different. Second, the composition of the book, right? We had a very
small -- some of the book, like tractor, which I said that it has a it has
only two cycles of representation, right? This is a six-monthly billing,
right?
If you have a billing in June, the slippages would happen in September,
right? So that book today is about 12%, 13% of my wheels book, right?
So that will have cyclical impact, right? Whenever there is a
representation. June and December, both are the cycle when the billing
happens. And so subsequently in September and as well as March, you
will have tractor slippages, right? There is no comparison, actually.
Prince Tiwari:
So I think just to conclude on this topic, because we have already
answered
Moderator:
Mr. Piran?
Prince Tiwari:
Hi, Piran. Sorry, I missed your name. Piran, we have already answered
this slippages question, I think, on couple of occasions. I will just say
one last point on this, and then we will probably not be able to take any
further question on this topic. Very simplistically, I think there is
nothing to read here. Our asset composition has changed in the last
three or four years, right? The numbers are not really comparable. We
should compare what Vivek said, year-on-year.
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That's a more relatable trend, because there is always an element of
seasonality in our portfolio. We do not and again, it's unfair to compare
with the banks. Banks lend to a completely different segment in a
completely different yield curve. Our segment is entirely more selfemployed and earn-and-pay segment, right?
I would say, when we looked at our internal data, when we look at yearon-year comparison, adjusting for seasonality, there's nothing
underlying there which points out any early warning signal. I hope that
answers.
Piran Engineer:
Okay. Yeah, that that does. Secondly, in your initial comments also you
mentioned that you are not chasing affordable housing finance due to
higher cost of funds. But just wanted your thoughts on two things. One
is, yes, your cost of funds are not comparable to a regular big bank,
but…
Prince Tiwari:
Not only cost of funds, we said competition as well.
Piran Engineer:
But how do you think about the total, like the cross-sell potential of
that customer, and let's call it the customer lifetime value? It's a large
market, affordable housing. In fact, you all started one of the largest
NBFCs a decade back.
Sanjay Agarwal:
Piran, you are right. Our communication would have been taken
wrongly. What we said that on an isolation basis, we do not want to
build more housing book, and that too in affordable housing book. But
if our existing customer who's having a good bank balance with us, or
relationship with us, we want to provide them a mortgage loan on the
current market rates, or maybe lower than that, and we already started
that.
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But that cross-sell of the book won't give you a large mortgage book
because we are not attempting on a very secular basis. That was our
commentary. It was not based for our existing customers.
Piran Engineer:
Got it. Okay, and just one last question, if I may
Moderator:
I'm sorry to interrupt, Mr. Engineer. We are unable to hear you, sir.
Piran Engineer:
Okay, sorry. My question was, a commercial banking book, what's the
mix between fixed and floating rate loans?
Prince Tiwari:
Almost all of it is floating rate.
Piran Engineer:
Sorry, could you repeat that?
Prince Tiwari:
The entire book is floating.
Piran Engineer:
Okay. Got it. Yeah. Okay, that's it from my end. Thanks, and all the best.
Moderator:
Thank you. The next question is from the line of Rajiv Mehta from YES
Securities. Please go ahead.
Rajiv Mehta:
Yeah. Hi, good evening. Thank you for giving me the opportunity. My
question is on the mortgages piece and mortgages book, which is a
large book, but the growth there has been slow for a while. How can
the growth revive there? And second is on the wheels portfolio or the
wheels segment, which is your auto loans and commercial vehicle
loans.
How has the festive period gone in terms of demand, and what can be
the growth outlook? Are you seeing that the growth can actually come
off on a on a larger base? And since these two segments do not really
grow well, can we then sustain this 25%, 26% growth momentum in the
coming quarters?
Sanjay Agarwal:
Okay. So wheels business, absolutely in good shape and performance
there is in shape. They are growing by 27%, 28% year-on-year, and the
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festive demand is strong there, and it will only go up from here because
Diwali is coming up next month and all those stuff. So I do not think
there is a challenge for us to grow in that sense, and we do not want to
grow above our level also.
And we have a large bucket, from two-wheeler to entire commercial or
a personal range. So that is largely sorted, and we want to become one
of the most prime lenders in this segment, right? As far as mortgage is
concerned, it has three parts to it. One of it is MBL/LAP, North or the
older market of us is growing in the north of 15%.
We do not want to grow our housing book much, but there also the
growth rate is around 10%-12%. But in Southern markets, where we
acquired business through the Fincare Bank, we really want to again
rebuild in that market with the strategy of AU as one unit. So it may
take some time in Southern markets because we want to build with our
own culture and values and our own strategy.
But we are really focusing on our mortgage business, and we are
hopeful that with the distribution we have across country, we should
touch in the range of 20% by next year. And we are pretty fine with that
range because other book, which is commercial banking or unsecured
piece, is growing more than 25%. Overall, we are targeting, again, in
the range of 2x to 2.5x to nominal GDP rate side. So we have enough
bucket available with us, and we can grow any of them to maintain that
growth rate.
Rajiv Mehta:
Got that. Any comments on collection efficiencies in October in spaces
like microfinance, small business loans, and tractor finance? And one
more related question is on the PCR. We have seen a PCR decline. So
when you guide for a credit cost of say 90 basis points for the whole
year, are you also looking at restoring the PCR a bit, raising PCR in the
coming quarters?
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Vivek Tripathi:
So, Mr. Mehta, PCR, we don't actually target PCR. It's all about the
policy on the provisioning, right, which we have become actually more
stringent. If you look at the end of Q1, we have given the disclosures as
well that we have become more stringent on as well as provisioning, as
well as on the write-off. And it is not function of targeted PCR.
The PCR had come down because we had written off some of the book
which the alignment, because there was an unsecured book, there was
a two-wheeler book. Within the unsecured piece, there were 3-4 books
which had a little differentiated write-off policy. So we aligned
everything, all the books in one line, hence you had more of that.
Second, as your security guaranteed book is increasing, which is about
7%-8% of the total overall book, it would look lower. But when you add
back the guaranteed portion, it would be actually much higher. It would
be about 67%-68%.
And in terms of, you know, giving the colors of October, that's
something which in the middle of month wouldn't be possible. As we
said that till 30th September, we had no impact. But a certain thing to
watch out for the whole country, we are also watching out, and there
is nothing to read in between that.
Rajiv Mehta:
Got it. Thank you. Best of luck.
Moderator:
Thank you. The next question is from the line of Ashlesh Sonje from
Kotak Securities. Please go ahead.
Ashlesh Sonje:
Hi, team. Good evening. Can you hear me now?
Moderator:
Yes, you are audible, sir.
Ashlesh Sonje:
Okay. Sir, just a few questions from my side. I'll list them out. Firstly, on
the CASA deposits, the growth has been quite commendable in the past
few quarters. It would be great if you can share the cost of SA deposits
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and term deposits for this quarter. I believe the last quarter's disclosure
was 5.05 in SA and 7.27 in TD. That is one.
Secondly, if you could talk about the trend in slippages in the mortgages
business specifically on a Q-o-Q and Y-o-Y basis? Third one, general
banking fees have declined Y-o-Y in this quarter. Can you explain the
reason there, and also remind us if there is any seasonality in the
booking of any of the fees inside this item? And lastly, CGFMU, if you
can call out the rupee cost in this quarter and the previous quarter.
Prince Tiwari:
Sorry, what was the last one, Ashlesh?
Ashlesh Sonje:
CGFMU premium cost.
Prince Tiwari:
Some of these are very descriptive questions. I don't think we disclose
some of these data, right? So I would suggest whatever is already
publicly disclosed, we'll keep our answers to that. Savings cost, we
don't disclose it, but I think you had asked this question last quarter as
well. The rates continue to be similar to what we had told you last
quarter, so there's no material change there. Then as far as the
mortgage book is concerned
Vivek Tripathi:
Yeah, so mortgage, I'll not quantify, but can give you a directional
answer that it's better off quarter-on-quarter, it's better off year-onyear.
Prince Tiwari:
And on the fee side, I think it's just seasonality. There's nothing else to
read into it.
Ashlesh Sonje:
Okay. Can you just elaborate a bit more, because on a Y-o-Y basis, I'm
wondering what is the seasonality here?
Prince Tiwari:
No, no. Last year same quarter, we probably had some more income
on insurance on a full year basis, our view is that that should get
adjusted. There's nothing more there. I think if you see all the other
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lines, in terms of processing fees, that's up 17%. If you look at the credit
card fee, if you look at the transaction fee, both are up more than 50%,
right? I think it's only the banking fee where largely the cross-selling
income goes. And there again, our view was that this quarter was a bit
slow, and we remain on track to deliver on a full year basis. So nothing
much to read there.
Ashlesh Sonje:
Understood. Perfect. Thank you. Those were all the questions I had.
Prince Tiwari:
Thanks so much, Ashlesh.
Moderator:
Thank you. Ladies and gentlemen, as that was the last question for
today, I now hand the conference over to Mr. Prince Tiwari for closing
comments.
Prince Tiwari:
Thank you, Rutuja, and thank you, everyone, for joining the call today,
and for your questions and for all your support. In case you have any
further questions, kindly reach out to the IR team. This is Prince signing
off on behalf of AU management and thank you so much. Look forward
to joining you next quarter.
Moderator:
Thank you very much. Ladies and gentlemen, on behalf of management
of AU Small Finance Bank, we conclude this conference. Thank you all
for joining us and you may now disconnect your lines. Thank you.
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