About the Company

AU Small Finance Bank is an Indian scheduled commercial bank that was founded as vehicle finance company AU Financiers (India) Ltd in 1996 and converted to a small finance bank on 19 April 2017.

AU Small Finance Bank has a long-standing track record of over two decades of being a retail-focused and customer-centric institution; serving low and middle-income individuals and micro/small businesses that have limited or no access to formal banking and finance channels. The Bank offers a comprehensive suite of loan, deposit & payment products and services.

Q3 FY21 Updates

Financial Results & Highlights

Consolidated Financials (In Crs)
  Q3FY21 Q3FY20 YoY % Q2FY21 QoQ % 9MFY21 9MFY20 YoY%
Sales 1925 1273 51.22% 1498 28.50% 4833 3625 33.32%
PBT 589 273 116% 409 44.01% 1262 749 68.49%
PAT 479 190 152% 322 48.76% 1002 552 81.52%

Detailed Results

  1. AU had a great quarter with revenue growth of 51% YoY and PAT growth of 152% YoY in Q3. Removing the effect from Aavas stake sale, 9M revenues grew 18% YoY and PAT grew 15% YoY.
  2. The AUM for the company grew 11% YoY, while disbursements in Q3 grew 34% YoY. Retail AUM remained high at 91% of total AUM.
  3. Deposits have gone up 24% YoY.
  4. CASA Ratio was at 22% in Q3FY21 vs 16% last year.
  5. The yield on AUM stayed stable at 14.3% in Q3 vs 14.7% a year ago. The cost of funds fell to 6.7% in Q3 vs 7.6% a year ago. Thus Yield spread grew to 7.6% in Q3 vs 7.1% a year ago.
  6. ROE for 9M fell by 230 bps YoY to 15.1%. On including the profit from the sale of a stake in Aavas, the ROE goes up to 27.3% in 9M.
  7. The cost to income ratio for Q3 was at 51.9% vs 53.2% a year ago. The same in 9M was at 49.2% vs 55.3% a year ago.
  8. Opex was at 3.7% in Q3 vs 3.8% a year ago. The same was 3.3% in 9M vs 3.7% a year ago.
  9. GNPAs declined to 1% vs 1.9% a year ago and NNPA followed a similar pattern and declined to 0.2% in Q3 vs 1% last year.
  10. PCR rose to 76% in Q3 vs 46.8% a year ago.
  11. CRAR for Q3 was maintained at 18.8% with tier 1 capital at 16.3%.
  12. NII for the SFB rose 25% YoY in Q3 and 26% YoY in 9M while other income rose 14% YoY in Q3 and 17% YoY in 9M.
  13. The company maintained a comfortable LCR of 111% in the quarter.
  14. Retail deposits (CASA + Retail TD) now at 55% of deposits vs 54% in Q2FY21 and 43% in Q2FY20.
  15. Overall collection efficiency in Q3 was at 97%.

Investor Conference Call Highlights

  1. The management is expecting a positive surprise in growth in Q4.
  2. The management feels that the provisioning done already is sufficient enough and AU won’t be seeing a lot more extra provisioning in the balance sheet in the next 3-5 quarters.
  3. The management is also expecting NPAs to remain down in the period of the next 3-5 quarters.
  4. The bank will maintain provisions covering 60% of NPAs and will probably not add more provisions according to the management. This situation will become clear in the next 1 to 2 quarters.
  5. The expenses will rise YoY due to the bank being in expansion mode. However, the management assures that the cost to income ratio will be kept stable at current levels.
  6. Opex levels will remain high at near 50-55% of income over the next maybe 2 years as the bank is looking to set up the franchise for the next 10-15 years.
  7. The wheels business has seen full customer activation of 81% and partial activation of 6%. The management states that this business is steadily normalizing as the customers’ activation levels are increasing. As the activation % rises, the collections will eventually rise to near 100%.
  8. The average number of transactions per customer is growing every month for AU. It has risen from 11 in Sep to 13.8 in Dec.
  9. AU has also seen an improvement of at least 21% in terms of average balances which are being maintained with the bank. This indicates that customers are starting to use their AU account for most of their spending which results in higher balances maintained in these accounts.
  10. Momentum in the wheels business is expected to sustain going forward as the personal segment in auto is seeing good sales numbers and rural pickup remains strong. Entry level car makers like Maruti and Hyundai are also seeing good momentum going forward which is reinforcing the belief in wheels business going forward.
  11. AU is also seeing good demand in the commercial banking space with many greenfield projects approaching AU for lending. Most of these commercial banking customers are small corporates. Real estate lending is also seeing good growth.
  12. 89% of disbursement in Q3 was on the retail side and 11% was on the corporate side.
  13. In ECLGS, AU has disbursed Rs 546 Cr YTD across 11000 customers. It did disbursement of close to Rs 150 Cr in Q3.
  14. ECLGS funds are mostly used by the customers for operational expenses and not for incremental capex.
  15. The bank will look for a capital raise round after FY22 only as it has enough capital for the next 3-5 quarters according to the management.
  16. The credit card segment is still in the development and strategy stage. The formal launch can be expected in Q4.
  17. The management has stated that AU is aiming to cover all facets of the digital banking space in the next 2 years.
  18. The average cost of books is just below 6%.
  19. The restructuring of loans is done on a customer case basis and moratorium is provided on principal payments for 3 to 6 month tenure depending on the customer’s request and circumstances.
  20. The expansion strategy on new states is to first establish branches in the state capital and then to go into other big cities. For example, when going into UP, the branch is first set up in Lucknow and then AU goes to other cities like Kanpur, Agra, etc. The management has stated that it intends to expand deeper in UP for the next 3 to 5 years.
  21. The deposit franchise will remain driven by cities but digital adoption and video banking should enable the bank to acquire customers faster than before.
  22. As the company consolidates its presence in these new states, the exposure to Rajasthan, which now accounts for 42% of assets, will come down organically due to the rise of other states.
  23. The management maintains a view that slippages will remain bound at 3.5-4% at the upper level.
  24. The management expects to restructure around 1-1.3% of the book and it is confident that most of this segment will not result in NPL.
  25. The bank remains bullish on digital banking and has already launched its super app, for both internet and mobile platforms. It has also launched video banking which should enhance acquisition, engagement, service, the transition of customers.
  26. AU already has 40,000 QR codes with an activation rate of 75% vs the industry benchmark of 50%. It plans to expand this number to 1 Lac by March.

Analyst’s View

AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring itself early as a commercial bank accepting savings and term deposits. The company made good progress in the quarter in almost all operational metrics and has seen a good rise in disbursements in Q3. The bank has also seen collections improving steadily and reach near pre-covid levels. The bank remains committed to its goal to build a granular customer led by digital and this is reflected in its efforts like the super app and the upcoming launch of its credit card and the adoption of video banking. The management is confident that the bank has enough provisions and capital for expansion for the next 3-5 quarters. It remains to be seen whether Au will be able to maintain its robust growth momentum and how will the company’s digital journey pan out. Nonetheless, given the company’s good performance record, its robust customer engagement, and its prudent management of its AUM, AU Small Finance Bank remains a good small finance stock to watch out for.

 


Q2 FY21 Updates

Financial Results & Highlights

Consolidated Financials (In Crs)
Q2FY21 Q2FY20 YoY % Q1FY21 QoQ % H1FY21 H1FY20 YoY
Sales 1498 1184 26.52% 1410 6.24% 2908 2353 23.59%
PBT 409 217 88.48% 264 54.92% 673 476 41.39%
PAT 322 172 87.21% 201 60.20% 523 362 44.48%

Detailed Results

  1. The Q2 revenues for the company rose 26.5% YoY while profits rose 87% YoY.
  2. The provisioning for the quarter was back to normal levels at Rs 57 Cr vs Rs 61 Cr in Q1FY20.
  3. The AUM for the company grew 10% YoY, while disbursements in Q2 was at 71% of Q2FY20.
  4. Deposits have gone up 22% YoY.
  5. CASA Ratio was at 21% in Q2.
  6. The yield on AUM stayed stable at 14.4% in H1 vs 14.7% a year ago. The cost of funds fell to 7.1% in H1 vs 7.9% a year ago.
  7. ROE for H1 fell by 140 bps YoY to 16.1%. On including the profit from the sale of a stake in Aavas, the ROE goes up 80 bps YoY to 22.5% in H1.
  8. The cost to income ratio for Q2 was at 54.1% vs 53.9% a year ago. The same in H1 was at 47.7% vs 56.6% a year ago.
  9. Opex was at 3.4% in Q2 vs 3.7% a year ago.
  10. GNPAs declined to 1.5% vs 2% a year ago and NNPA followed a similar pattern and declined to 0.5% in Q2 vs 1.1% last year.
  11. PCR rose to 71.1%% in Q2.
  12. CRAR for Q2 was maintained at 21.5% with tier 1 capital at 18.3%.
  13. NII for the SFB rose 24% YoY in Q2 and 27% YoY in H1 while other income fell 6% YoY in Q2 and rose 19% YoY in H1.
  14. The company maintained a comfortable LCR of 140% in the quarter.
  15. Retail deposits (CASA + Retail TD) now at 54% of deposits vs 45% in Q1FY21 and 41% in Q2FY20.
  16. Rajasthan remains the biggest market for the company with 42% of AUM disbursed and 27% deposit book.
  17. Overall collection efficiency post moratorium was at 78% vs the normal 80%.
  18. Overall collection efficiency was at 96% in Q2 against monthly billing.
  19. The Bank carries Rs 278 Cr of COVID-19 related provisions.

Investor Conference Call Highlights

  1. AU recently piloted an end-to-end digital lending platform for personal loans, where it integrated 48 different APIs in 1 system, including its own credit rule engine for credit underwriting and all the decision making of these engines.
  2. It has also gone live with Maruti Suzuki for an end-to-end lending journey for buying personal cars. Using a completely digital platform with other OEMs is also in the works.
  3. The bank revamped its internet banking system and mobile banking platform.
  4. For the credit card journey, AU has partnered with Fiserv which is a global leader in credit card platforms.
  5. The retail-led focus has helped the bank to retire 2,000-plus crores of bank deposits in Q2. This has led to an 80 bps YoY reduction in the cost of deposits.
  6. The bank will be adding new branches in Bhuvaneshwar, Hyderabad, and Kolkata.
  7. As part of its retail penetration strategy, the company is not only providing offers on national brands like Amazon, Myntra, Swiggy, but also in local city-based merchants and shops like Laxmi Misthan Bhandar which is a historical sweet shop in Jaipur.
  8. Customers who had availed complete moratorium has reduced from 11% in June to 5.5% of gross advances as on 31st of August 2020.
  9. 5% of this 5.5% of customers have paid 1 EMI or more in September and October and are active again.
  10. The bank is not looking to create extra provisions and will review and decide in the coming quarters whether any new provisions need to be created.
  11. The larger focus in terms of activation of customers is to get the customers to primarily transact using the AU Bank account. This is done by providing access and operations across all digital channels and mediums and releasing strong offers for use of debit cards or payment mechanisms in different online platforms.
  12. The company is reducing interest rates in lower buckets but is keeping the flagship rate of 7% in the bucket of 10 lakh and above.
  13. The company is looking at a strategy where at least 1% of customers have at least 5, 6 products in use at a time. The bank is striving is to increase wallet share for each customer and to ensure the longer customer stays.
  14. The bank is looking to maintain the interest benefit of 1.25-1.5% in TD as compared to the top 4 private banks in India to attract new customers from PSU and large private sector banks.
  15. The retention rate in terms of retail TD is at 70% which is around the industry average.
  16. The long-term general strategy for AU is to build the retail and granular deposit franchise, which is primarily led by the transacting customers and the active customers on the bank side.
  17. The management believes that deposit generation and deposit retention will revolve around how well the bank is equipped in terms of their digital journeys. Thus all efforts are being concentrated on building a digitally-led retail granular franchise.
  18. The bank has been able to generate growth in CASA mainly due to focusing on targeted products for specific customer bases like nonresident Indians, housewives, retired pensioners, and senior citizens.
  19. Disbursement in Sep-20 was at 99% of Sep-19.
  20. The bank has no restructured cases to date and it has not received any inquiries regarding it.

Analyst’s View

AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring itself early as a commercial bank accepting savings and term deposits. The company made good progress in the quarter in almost all operational metrics and has seen good growth in the deposit franchise in Q2. The bank has also seen collections improving steadily and reach near pre-covid levels. The bank remains committed to its goal to build a granular customer led by digital and this is reflected in its efforts in providing different digital products and offers to its existing customers. It remains to be seen how the whole COVID-19 situation pans out and whether there are any surprises in store for the banking industry in the near future. Nonetheless, given the company’s good performance record, its robust customer engagement, and its prudent management of its AUM, AU Small Finance Bank remains a good small finance stock to watch out for.

 

 


Q1 FY21 Updates

Financial Results & Highlights

Consolidated Financials (In Crs)
Q1FY21 Q1FY20 YoY % Q4FY20 QoQ %
Sales 1410 1168 20.72% 1367 3.15%
PBT 264 259 1.93% 165 60.00%
PAT 201 190 5.79% 122 64.75%


Detailed Results

    1. The Q1 revenues for the company rose 21% YoY while profits rose 5.8% YoY. PBT was up only 1.9% YoY
    2. The fall in PBT was mainly due to increased provisioning done by the bank for COVID-19. The provisioning for the quarter was Rs 181 Cr against the normal levels of Rs 31.5 Cr in Q1FY20.
    3. The AUM for the company grew 17% YoY, while disbursements in Q1 were at Rs 1181 Cr including TLTRO 2.0 of Rs 246 Cr.
    4. Retail loans continue to form the majority of the loan portfolio accounting for 84% of total loans in Q1.
    5. Deposits have gone up 35% YoY as of 30th June ’20.
    6. CASA Ratio was at 16% in Q1.
    7. Yield on AUM stayed stable at 14.6% in Q1 vs 14.5% a year ago. Cost of funds fell to 7.1% in Q1 vs 7.9% a year ago.
    8. ROE for Q1 improved by 110 bps YoY to 15.8%. On including the profit from the sale of stake in Aavas, the ROE goes up to 17.9%.
    9. Cost to income ratio for Q1 was at 41.4% vs 59.6% a year ago.
    10. GNPAs declined to 1.7% vs 2.1% a year ago and NNPA followed a similar pattern and declined to 0.6% in Q1 vs 1.3% last year.
    11. PCR rose to 63.7% in Q1.
    12. CRAR for Q1 was maintained at 21.7%.
    13. NII for the SFB rose 30% YoY while other income rose 48% YoY.
    14. The company maintained a comfortable LCR of 150% in the quarter.
    15. Rajasthan remains the biggest market for the company with 42% of AUM disbursed and 279 branches in the state.
    16. Complete Moratorium has been availed by 11% of total customers by value.
    17. The company has made Rs 181 Cr of the provision in Q1 including Rs 140 Cr for COVID-19. This brings total provision for COVID-19 up to Rs 278 Cr which is around 1% of total gross advances and 10% of moratorium book.
    18. Overall collection efficiency improved to 90% in June from 54% in April.
    19. SA deposits grew 14% QoQ despite the disruptions in Q1. Currently, all branches are operational for the company.

Investor Conference Call Highlights

  1. The number of employees in offices and field has improved to 93% in June.
  2. The main focus of the company in Q1 was to maintain customer engagement and to ensure that NPAs stay stable for the company.
  3. The company also saved a lot of discretionary expenses as no disbursements took place in the quarter.
  4. The management is comfortable with the company’s current other business lines and they are mostly looking to focus on their core business of providing banking and additional services like credit cards, etc in rural and semi-urban India.
  5. The management admits that insurance, investment, and payments remain focus areas for the bank but it will take time to grow and consolidate its brand image in these spaces for AU.
  6. The management maintains that it will continue to lend to NBFCs purely base on opportunity basis and it was never a franchise business for the company. The company has internally set a cap of NBFC lending at 10% of total assets.
  7. The wheels segment has been lower than the industry average for the company as it is mainly concentrated in major cities like Bombay, Delhi, Pune, Ahmedabad, and these areas have seen commercial passenger vehicle usage remain subdued due to COVID-19.
  8. In normal times, 80% of EMIs are expected to be paid each month. This % is expected to be at 72-73% in July and 77-78% in August.
  9. The management states that as uncertainty due to COVID-19 & lockdown went down and businesses opened up, loan repayments also rose as customers realized that the interest outgo would be larger in the case of the moratorium. Collection efficiency was at near 95% which was also aided by the fact that the company built on momentum fast since opening after the lockdown.
  10. Currently, the bank is carrying liquidity of Rs 7000 Cr. owing to uncertainty ahead.
  11. According to the management, constant customer engagement was what enabled the bank to grow its deposit base despite setbacks to the industry like the Yes Bank crisis and COVID-19. The entire focus is to build a relationship-oriented granular retail business on the ground which is reflected in the retail and SA deposit base growth.
  12. The company is also moving towards quality-oriented and profile-based customer acquisition particularly the professional and salaried segment.
  13. 67% of all customers have made full payment on their pending EMIs.
  14. Collections for Q1 was at Rs 2200 Cr.
  15. All the disbursements in the wheels division have been made to existing customers only. The company has also made a conscious decision not to disburse in cash in this business segment.
  16. Most of the NBFC book is lent to large NBFCs with AAA or AA rating.
  17. The management expects the impact of COVID-19 to be worse than that of demonetization.
  18. The company has a very small book in commercial loading vehicles and that too is mostly in rural.
  19. There is an incremental growth of around Rs 700 Cr in retail term deposits in Q1.
  20. The core focus of the bank is to build retail, granular deposit base with a larger focus on CASA this year.
  21. Incremental funds raised in Q1 were at Rs 10,000 Cr

Analyst’s View

AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring themselves early as a commercial bank accepting savings and term deposits. The company made good progress in the quarter in almost all operational metrics and has been performing well in the tough economic conditions and strengthening its brand in the market. The bank has done well to keep engaging its customers in such trying times and to maintain enough provisioning and liquidity for uncertain situations. This has led to an exemplary operational display of growth in SA deposits of 14% in Q1 despite all the disruptions from COVID-19. It remains to be seen how the whole COVID-19 situation pans out and how will the moratorium ending pan out for the bank and the industry in general. Nonetheless, given the company’s good performance record, its robust customer engagement, and its prudent management of its AUM, AU Small Finance Bank remains a good small finance stock to watch out for.


 

 

Q4 FY20 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 1367 1007 35.75% 1273 7.38% 4992 3411 46.35%
PBT 165 176 -6.25% 273 -39.56% 914 580 57.59%
PAT 122 118 3.39% 190 -35.79% 675 382 76.70%


Detailed Results

    1. The Q4 revenues for the company rose 36% YoY while profits rose 3.4% YoY. FY20 revenues and PAT was up 46% and 77% YoY respectively.
    2. The fall in PBT was mainly due to increased provisioning done by the bank for COVID-19. The provisioning for the quarter was Rs 150 Cr against the normal levels of 30-40 Cr.
    3. The AUM for the company grew 27% YoY, while disbursements for the FY20 period grew 16% YoY and deposits grew 35% YoY.
    4. Retail loans continue to form the majority of the loan portfolio accounting for 84% of total loans in FY20.
    5. Deposits have gone up 35% YoY as of 31st March ’20.
    6. CASA Ratio was at 16% in Q4.
    7. Yield on AUM improved to 14.7% in Q4FY20 vs 14.3% a year ago. Cost of funds fell to 7.7% in FY20 vs 7.9% a year ago.
    8. ROE for FY20 improved by 180 bps YoY to 15.8%. On including the profit from the sale of stake in Aavas, the ROE goes up to 17.9%.
    9. Cost to income ratio for Q4 was at 57.9% vs 58.3% a year ago.
    10. GNPAs declined to 1.7% vs 2% a year ago and NNPA followed a similar pattern and declined to 0.8% in Q4 vs 1.3% last year.
    11. PCR rose to 52.5% in Q4.
    12. CRAR for Q4 was maintained at 22%.
    13. NII for the SFB rose 43% YoY while other income rose 33% YoY.
    14. The company maintained a comfortable LCR of 133% in the quarter.
    15. Rajasthan remains the biggest market for the company with 43% of AUM disbursed and 262 branches in the state.
    16. Opened 16 new branches in Q4.

Investor Conference Call Highlights

  1. The company is starting self on-boarding on fixed deposits through video KYCs from the first week of May.
  2. 58% of AU touchpoints are in green or orange zones.
  3. 63% of business is in rural or semi-urban areas out of which 65% are in green zones.
  4. Only 11% of business is in super metros.
  5. The company received 75% of total EMIs due in April.
  6. The bank has made Rs 138 Cr in provisions for COVID-19.
  7. March contributes around 10-15% of total business in the year.
  8. 47% of people have paid full EMIs while 23% of people have opted to pay partial EMIs.
  9. On average only 10% of customers do not pay EMIs. Thus overall, it can be said that only 20% of customers didn’t pay up EMIs due to COVID-19.
  10. The company added 13000 new accounts in April which is around 1/3rd of normal activity for the bank.
  11. In the term loans for working capital, 93% of customers repaid their dues in April.
  12. Around 25% of the loans have gone into moratorium.
  13. The management believes that there should not be more than 50 bps of delinquency in used vehicles business as compared to the new vehicles business.
  14. The management clarifies that the majority of its vehicle finance customers are single drivers and not fleets and these customers are well distributed enough to bounce back quickly as revival comes.
  15. The total provisions taken are around Rs 500 Cr with Rs 240 Cr on NPA provision.
  16. The total costs for last year were Rs 1400 Cr where 65% were fixed costs.
  17. The bank will continue to maintain high liquidity all the way through June. The management will focus on cost optimization during the next few months.
  18. The management has admitted that the SFB industry has been hit from the trust deficit from the Yes Bank fiasco. The company will continue to maintain and enhance its trust factor with customers and will continue to remain focused on retail loans only.
  19. 94% of NBFC customers have paid off their EMIs. 90% of AUM is secured.
  20. The management stated that the bank requires another quarter to be able to estimate and provide proper guidance on the growth ahead for the bank.
  21. The management is confident that the bank can push on faster into emerging segments than its competitors. This is mainly due to the presence of the bank in various lending segments and the company can scale up operations in whichever sector rises fastest.
  22. In the shopping dhamaka, the bank has also seen digital transactions per customer rise to 8.1 per month from 5.6 in September and the transacting customers have grown 25% since then as well. The number of customers with more than 4 transactions is 1.4 lacs which is 51% up in the same period.

Analyst’s View

AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring themselves early as a commercial bank accepting savings and term deposits. The company made good progress in the quarter in almost all operational metrics and has been performing well in the tough economic conditions and strengthening its brand in the market. The Small Finance Bank industry was hit hard from the Yes Bank situation and the COVID-19 outbreak further deepened the softness in the industry. The bank has done well to keep engaging its customers in such trying times and to maintain enough provisioning and liquidity for uncertain situations. It remains to be seen how the whole COVID-19 situation pans out and what second-order effects will remain in the small finance bank industry from it. Nonetheless, given the company’s good performance record, its robust customer engagement, and its prudent management of its AUM, AU Small Finance Bank remains a good small finance stock to watch out for.


Q3 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 1272.83 894.29 42.33% 1184.21 7.48% 3625.38 2403.6 50.83%
PBT 272.74 146.21 86.54% 216.69 25.87% 748.76 403.68 85.48%
PAT 190.19 95.33 99.51% 171.94 10.61% 552.46 263.57 109.61%


Detailed Results

    1. The Q3 revenues for the company rose 42% YoY while profits rose 99.5% YoY. 9M revenues and PAT was up 51% and 110% YoY respectively.
    2. The AUM for the company grew 37% YoY, while disbursements for the 9M period grew 23% YoY and deposits grew 72% YoY.
    3. Retail loans continue to form the majority of the loan portfolio accounting for 81% of total loans in 9MFY20.
    4. Deposits have gone up 63% YoY as of 31st Dec ’19.
    5. CASA Ratio was at 17% in Q3.
    6. Yield on AUM improved to 14.7% in Q3FY20 vs 14.3% a year ago. Cost of funds fell to 7.8% in 9MFY20 vs 7.9% a year ago.
    7. ROE for 9MFY20 improved dramatically by 420 bps YoY to 17.4%. On including the profit from the sale of stake in Aavas, the ROE goes up to 19.9%.
    8. Cost to income ratio for Q3 was at 53.2% vs 60.6% a year ago.
    9. GNPAs declined to 1.88% vs 2.01% in last quarter and NNPA followed a similar pattern and declined to 1.01% in Q3 vs 1.14% in last quarter.
    10. PCR rose to 46.8% in Q3.
    11. CRAR for Q3 was maintained at 19.3%.
    12. NII for the SFB rose 46% YoY while other income rose 52% YoY.
    13. The bank added 16 branches in Q3.
    14. Q3 saw an investment of Rs 525 Cr into the bank from Camas Holdings (Temasek) for warrants conversion.
    15. The company maintained a comfortable LCR of 95% in the quarter.
    16. Rajasthan remains the biggest market for the company with 41% of AUM disbursed and 249 branches in the state.

Investor Conference Call Highlights

  1. The management has clarified that the drop in disbursement yields in vehicle loans in Q3 was mainly due to the festive season and December discounts and the change in the product mix of more loans to new vehicles.
  2. The management has guided that it expects the company’s NIMs to remain stable at current levels of going forward.
  3. The management has identified SME and NBFC lending as a good area for the company. It expects good growth in disbursements of 28%-30% for the next 2 years after which the company is expected to try and go to the next level as a universal bank.
  4. The management maintains that the company has not seen any challenges in collection or asset quality in its vehicle loans business. This is mainly because the vehicle loan segment covers all types of vehicles including tractors and the market stress is currently only in the LCV and HCV segment which is not that big for the company yet.
  5. The average ticket size for a personal loan is around Rs 1.69 Lacs and all personal loans have been issued only to existing bank customers. This is mainly done to analyze repayment patterns and also to provide insights on existing customer behaviour.
  6. The company has taken various steps to tighten credit criteria for borrowers like increasing margin requirements, etc to improve asset quality and reduce defaults.
  7. In the vehicle loan business, the company is lending to 80% new customers and 20% to existing bank customers.
  8. The company is targeting to open 200 new branches by March ’22, with the majority of them being in semi-urban and rural areas. The management expects this expansion to be done prudently so that the cost to income remains stable and does not rise too fast.
  9. The management has mentioned that their vehicle finance business in states other than Rajasthan is still low and it expects it to take at least 6 months to one year to gain meaningful traction in this segment.
  10. For their deposit segment, the company is not targeting a big number of customers but it is trying to concentrate on big-ticket customers like in urban markets, the company is opening customers at a minimum deposit of Rs 25000.
  11. The management has mentioned that it does not have any specific target for PCR and is fine as long as the provisions meet the losses.
  12. In the SME loans, business, around 90% of all loans have been made out to new customers. The management feels confident that going forward this segment book will become the biggest book for the organization.
  13. The company is looking to grow at a rate of 25% per year with AUM growth of roughly 35% each year in the next 2 years. The management has indicated that the company will raise additional capital whenever it feels the need to do so to stay on track for the above targets.

Analyst’s View

AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring themselves early as a commercial bank accepting savings and term deposits. The company made good progress in the quarter in almost all operational metrics and has been performing well in the tough economic conditions and establishing its brand in the market. The company has done well to expand steadily on almost all of its loan segments particularly SME loans. It remains to be seen whether the company will be able to stay on course to become a universal bank in the next few years and achieve the ambitious growth targets proposed by the management smoothly. Nonetheless, given its commanding presence in Rajasthan and its steady expansion of all business segments into big states of Gujarat and Maharashtra, AU Small Finance Bank remains a compelling SFB stock for all investors.


Q2 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % H1FY20 H1FY19 YoY%
Sales 1184.21 805.89 46.94% 1168.33 1.36% 2352.54 1509.3 55.87%
PBT 216.69 140.2 54.56% 259.32 -16.44% 476 257.47 84.88%
PAT 171.94 91.41 88.10% 190.32 -9.66% 362.26 168.23 115.34%


Detailed Results

    1. The revenues for the company rose 45% YoY while profits rose 55% YoY. PAT was up 88% YoY.
    2. The AUM for the company grew 38% YoY, while disbursements grew 40% YoY and deposits grew 72% YoY.
    3. Retail loans continue to form the majority of the loan portfolio accounting for 79% of total loans and 95% of all loans are secured with an average ticket size of Rs 5 Lacs.
    4. Disbursement yields improved by 40 bps YoY to 14.7% while cost funds also went up 10 bps YoY to 7.9% in H1FY20.
    5. Cost to income reduced to 56.6% in H1FY20 vs 60% in H1FY19.
    6. Wheels disbursements saw YoY growth of 27%.
    7. MSME disbursements grew 32% YoY.
    8. The gross NPA ratio came at 2% while net NPA was at 1.1%. The company maintained a PCR ratio of 43.9%.
    9. The company maintained a healthy CRAR ratio of 17.9% and a CASA ratio of 16% in Q2.
    10. The company opened 10 bank branches in Delhi, Haryana, and Rajasthan in the quarter. They maintained their good rural and semi-urban penetration with 62% of branches from these regions.

Investor Conference Call Highlights

  1. The bank has migrated to daily tallying of NPAs since Q1 and this is helping it keep track of collections and delinquencies very closely.
  2. The incremental cost of funds was much favorable to the company at 7.45% which is an improvement of 10bps above 7.55% in Q1.
  3. The bank also maintains a very healthy LCR of 95% with additional liquidity buffers in place.
  4. The management sees a drop in the cost of money of at least 20-30 bps in the coming 6 months.
  5. The management conveyed that it was merely acting conservatively when it raised the provisioning in the current quarter above 1%.
  6. The company has been increasing headcount mainly to step up new divisions like housing loans and others.
  7. The company is providing 6% in SA and 7.65% in the overall FD book.
  8. The management maintains that the number of channels for their used vehicle finance business has gone up significantly to almost 2000 from 700 a year ago which has helped them expand this division at a good pace. Also, the company has good penetration in smaller towns and rural areas which has also helped them source underserviced regions possibly.
  9. The company believes that it is in firm control of its NBFC activities and the industry should recover going forward.
  10. The management stick to its previous guidance of maintaining the AUM growth of 35%-40% for FY20 and the launch of newer products should help them maintain this growth momentum for a few years.
  11. The management has maintained that it is concentrating on the used vehicle finance more as compared to new vehicle finance as the yield in the former is higher and by far there is a higher demand for used vehicles in the market as compared to new vehicles.
  12. The management maintains that home loans will remain a key retail area for the company and it will be looking to take advantage of the current challenging HFC market and make a name for the company by growing this division. Currently, home loans form 10% of retail assets and are of an average ticket size of Rs 25+ Lacs and provide a yield of around 13%.
  13. The management has yet to decide on how to use the money generated from the reduced tax regime in the long term but it should get clear on this strategy in the next 2 quarters.
  14. The company will continue to keep the residual stake in Aavas and will use it whenever it is in need of raising capital. The current value of the stake is around Rs 800 Cr.
  15. The management is comfortable with the current PCR mainly because of the high level of secured lending that the company has done.
  16. 65% of the company’s term deposits are bulk deposits and around 40% of all term deposits are non-callable.
  17. The company has only 5 accounts as NPAs now and it is expecting recoveries in 3 of these in the coming quarter.

Analyst’s View

AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring themselves early as a commercial bank accepting savings and term deposits. The company made good progress in the quarter in almost all operational metrics and has been performing well in the tough economic conditions and establishing its brand in the market. The company’s focus on core banking products and secured lending provides good assurance of prudent risk management on the company’s part and its improving operational metrics provide good evidence of operating leverage kicking in. It remains to be seen how the company will establish itself in its new product categories which already have many incumbent players. Nonetheless, given the growth momentum that the company has sustained for so long and the improving performance of their core banking division, AU Small Finance Bank has established itself as a good small finance bank.


 

 

 

Q1 2020 Updates

Financial Results & Highlights

 

Standalone Financials (In Crs)
Q1FY20 Q1FY19 YoY % Q4FY19 QoQ %
Sales 1168.33 703.41 66.10% 1007.44 15.97%
PBT 259.32 117.28 121.11% 176.44 46.97%
PAT 190.32 76.82 147.75% 118.23 60.97%

 

Detailed Results

    1. The revenues for the company rose 66% YoY while profits rose 56% YoY. PAT was up 147.75% YoY as it also had the additional income from the sale of a small stake in Aavas Financiers Ltd.
    2. The AUM for the company grew 44% YoY, while disbursements grew 40% YoY and deposits grew 100% YoY. The company added 1.6 lac new deposit and loan accounts in the quarter.
    3. Retail loans continue to form the majority of the loan portfolio accounting for 80% of total loans.
    4. Disbursement yields improved by 90 bps QoQ while cost funds declined 10 bps QoQ to 7.9%.
    5. Wheels disbursements saw YoY growth of 27%.
    6. MSME disbursements grew 32% YoY.
    7. The gross NPA ratio came at 2.1% while net NPA was at 1.3%. The company maintained a PCR ratio of 40.5%.
    8. The company mobilized more than Rs 850 Cr in retail term deposits.
    9. The company maintained an AAA-rated vehicle loan pool of Rs 1336 Cr.
    10. The company divested 0.8% of their 7.2% stake in Aavas Financiers Ltd resulting in a pre-tax income of Rs 77 Cr.
    11. The company also launched a 3 in 1 Bank, Trading and Demat account in association with Motilal Oswal Financial Services.
    12. The company maintained a healthy CRAR ratio of 18.6% and a CASA ratio of 19% in Q1.
    13. Operating expenses as a % of revenues fell to 3.8% from 4.8% last year.
    14. Cost to income ratio in Q1FY20 was at 59.6% from 60.9% in Q1FY19.
    15. The loan book growth for the retail assets was 49% while MSME loan book grew 37% YoY.
    16. The company total assets grew 61% YoY with advances growing 51% YoY and investments growing 124% YoY.
    17. The company opened 10 business correspondent banking outlets in the quarter. They maintained their good rural and semi-urban penetration with 64% of branches from these regions.
    18. The company also boasted increasing debit card users (which doubled in the past year) as well as penetration (72% vs 62% last year).

Investor Conference Call Highlights

  1. The proportion of CASA and Retail deposits came in at 46% while the proportion of individuals, HUFs, sole proprietors and partnerships rose to 35% from 31% a year ago.
  2. The company is targeting a cost to income ratio of 52-53% in the next 2-3 years. They are also targeting a fixed asset to total asset ratio of 3.25% by FY22.
  3. The management believes that RoA levels of 1.8-1.9% are achievable by FY ‘21,’22 from the current level of 1.4%.
  4. The company sees the used car lending segment to get bigger in the future. The traction in India on new to used is around 1:1.2. in developed markets this ratio goes on to 1:3. With the advent of multiple online used car marketplaces like CARS24, CarDekho, the company expects this segment to expand even faster than before.
  5. Given the current auto sector slowdown since one year ago, the company shifted its focus on the vehicle loan business from new vehicles to used vehicle business highlighting a good strategic call on part of the management.
  6. The company expects to see an improvement in ROE from Q4FY20 onwards. This is mainly because the company has started building a high yield book and these changes in the asset mix will take a few quarters to bring up the overall yields.
  7. The management has maintained that they will maintain current spread levels till the time that they remain a small bank. They also see the cost of funds coming down in the next few years.
  8. The company has yet to decide how to build their liability franchise as a unit. They have a lot of other sources of money like securitization, refinance, etc, which are separate from their predominant sources of savings and term deposits. They are still figuring out how they should proceed in building their banking institution and hope for some clarity by the end of the year.
  9. The company’s primary target right now is to build a low cost, long term stable retail term deposit book.
  10. The management has mentioned that they will not be raising branch liability at a higher cost and will not be pushing for aggressive branch expansion at higher costs.
  11. The management is committed to maintaining a liquidity cushion of 8% to 10% of their assets at all times.
  12. The management has identified the cost of deposits, people retention, and the economy as the three major challenges for the company to reach its goal of Rs 70,000 Cr in assets and 5 million customers by FY22.
  13. The management explained that they had done securitization in this year because they were getting better costs with securitization as compared to PSLC (Public Sector Lending Certificates) and will continue to do so if the situation persists.
  14. The management has identified 60-70 basis points as the level of sustainable credit cost in the next 5 years.
  15. The management clarifies that they are not undertaking undue risk by expanding in the used vehicle loan segment. They assert that risk-adjusted IRR is better in this segment and thus they are pursuing it.
  16. The management has clarified that the reason that incremental yields are going up is due to product mix change in the yields and because they were increasing their lending rates in the declining Agri segment and the retail segment.
  17. The company is yet to decide on any further stake sales in the near future.
  18. On a full-year basis, the company is expected to keep RoA at current levels and they should start seeing improvements in it once the company breaks even in-branch banking.
  19. In the savings accounts, the company operates at 5% to 6% rates which come out to be 6.1-6.2% on average. In retail term deposits, the company offers a peak rate of 8.1%.
  20. The management has maintained that the main drivers for RoA would be reducing OpEx to revenue over time. They are targeting OpEx levels of 3.7-3.8% this year and expect to reach 3.2-3.3% by Q4FY22.
  21. The company has reassured that they have no exposure to Reliance Home Finance, Dewan Housing Finance and other such entities and their book is mainly filled with small and mid-sized credits.

Analyst’s View

AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring themselves as a commercial bank accepting savings and term deposits. They have also pivoted to used vehicle finance from new vehicle finance showing that they are ready to make wholesale changes in their operations when required. The management admits that the company is going through a transitionary phase and all of the company’s operational goals and mechanisms have not been set in stone yet. Given the current economic environment, the company has delivered exemplary performance and their focus on not over-expanding their branch banking at higher costs and keeping operational low has helped them maintain a stable RoA which is expected to rise once their branch banking operations break even. It remains to be seen how long the company will be able to maintain its growth momentum or what commercial or business focus area they will settle on. Nonetheless, given its good recent performance and the healthy loan book with stable NPAs, AU Small Finance is a good stock to watch out for, especially for any investors banking on the theme of microfinance.

 

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