AU Small Finance Bank Ltd Q3 FY23 Earnings Conference Call Insights

Key highlights from AU Small Finance Bank Ltd (AUBANK) Q3 FY23 Earnings Concall

Management Update:

• [00:07:23] AUBANK added around 3.3 lakh customers last quarter and expanded its third-party offering by entering into partnerships with HDFC Life and ICICI Lombard for insurance.

• [00:13:03] In 3Q23, AU Bank saw strong performance across all aspects of its businesses, including deposit growth, CASA growth, improved granularity and stable spreads.

• [00:14:20] AUBANK opened 42 new touch points in the quarter, taking the total to 1,015 locations across 21 states and 3 union territories.

• [00:18:58] The company’s credit card preposition scaled further with 3.9 lakh live cards and 35,000 monthly card issuance run rate. Asset quality remained stable and AUBANK remain confident of delivering a robust 4Q.

Q&A Highlights:

• [00:26:40] Rohan Mandora from Equirus asked about the thought process behind consuming contingent provisions despite good asset quality and profitability. Sanjay Agarwal MD said the company used some of its COVID-related contingencies in 1Q23 to create floating provisions. The remaining funds were used for restructure, either in the P&L or for NPA provisions for restructured books.

• [00:26:58] Rohan Mandora of Equirus also enquired about the reason for employee base decreasing in the last two quarters. Vimal Jain CFO said that during the COVID period, there was some extra hiring done to cover for people taking leaves and returning, but as things are normalizing, things are being rationalized back to normal.

• [00:31:25] Nitin Aggarwal from Motilal Oswal asked why the disbursement yield during 3Q23 went down vs. 2Q23. Sanjay Agarwal MD said yield was lower in 3Q than 2Q due to the Diwali festive season. The decline in yields was only 5 bps, which was partly due to an increase in commercial banking. Yields in retail have held up.

• [00:32:37] Nitin Aggarwal at Motilal Oswal enquired How long does AUBANK expect collection efficiencies of more than 100% to continue and what is driving it. Sanjay Agarwal MD replied that people have become more conscious and disciplined on repaying their EMIs on time, which has resulted in a collection rate above 100%. AUBANK believes this trend to continue for the foreseeable future, resulting in strong asset quality.

• [00:38:36] Nitin Aggarwal from Motilal Oswal queried that with collection efficiency being more than 100%, if it means that AUBANK is recovering from the bank dues. Sanjay Agarwal MD answered that the company has been able to recover loans that were past due to strong business activity, and saw strong collections across different products in the quarter, which indicates strong underlying cash flows.

• [00:39:37] Mahrukh Adajania of Nuvama asked about the outlook for 4Q23 and longer term in terms of cost of funds or cost of deposits. Vimal Jain CFO clarified that the company expects to stay in the 5.95% range for 4Q, as it was last year. And for next year, it’s difficult to tell.

• [00:44:16] Ashlesh Sonje with Kotak Securities enquired that on the cost of funds front, if there has been any run down of any older higher cost borrowings on the book. Vimal Jain CFO answered that AUBANK do not have any grandfathered borrowing. And this is the sixth year running without them.

• [00:44:47] Ashlesh Sonje with Kotak Securities asked about the blended cost of deposits on the bulk TD book. Vimal Jain CFO said that overall bulk TD cost is around 6.4% in 9 months for this year.

• [00:46:25] Ashlesh Sonje with Kotak Securities enquired if the company has hiked the interest rates on new loans in the SBL book until now this year. Sanjay Agarwal MD replied that the hike is not much. It’s a very long-term book. So AUBANK don’t want to push that rate on a higher side.

• [00:50:14] Nidhesh Jain from Investec queried about the outlook on growth currently and for FY24. Sanjay Agarwal MD answered that the bank’s team is on track to meet its growth targets for the quarter with 27-28% growth in property, assets, and deposits. Digital properties and SBUs are performing well, and the cost of money is low at 5.85%. The team is optimistic but cautious to ensure sustainable growth.

• [00:56:14] Hiral Desai from Anived Portfolio asked about the margin outlook for the next year and beyond. Sanjay Agarwal MD answered that it’s too early to tell what the future of interest rate cycles holds, but as a bank AUBANK is well positioned to manage NIMs and other sources of income regardless of what happens.

• [00:59:15] Hiral Desai from Anived Portfolio enquired about the core fee income growth over the next 2-3 years. Sanjay Agarwal MD replied that still AUBANK is waiting for AD1 license. So one will see better cross-selling ability of AUBANK, building a lot many hooks for the customers so that they just bank with AUBANK. The results can be seen from next year onwards.