AU Small Finance Bank Limited (AUBANK) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to AU Small Finance Bank Q3 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aseem Pant, VP, Investor Relations. Thank you, and over to you, Mr. Pant.

Thank you, Nirav. Good day to everyone, and welcome to AU Bank's earnings call for the third quarter of FY '22. We thank you all for joining the call today, and we hope you and your dear ones are safe and well. For approximately the first 30 minutes of the call, we will have brief remarks by a few members of the senior management, followed by 30 to 45 minutes of Q&A. Firstly, we will have our MD and CEO, Mr. Sanjay Agarwal, share his thoughts on the performance and overall outlook for the bank. He will be followed by our ED, Mr. Uttam Tibrewal, who will share his thoughts on business outlook and asset strategy. And then by our Group Head Liabilities, Mr. Rishi Dhariwal, who will share his thoughts on liabilities outlook. Finally, we will have Mr. Vikrant Jethi, Head of Collections, who will discuss asset quality for the bank. Besides them, we also have a few other members of our senior management to answer any questions you might have. [Operator Instructions] With that, I'll request our MD and CEO, Mr. Sanjay Agarwal to share his thoughts on the bank's performance and outlook.

Yes. Thank you, Aseem. Good evening, everyone, namaskar. Thank you for joining in. We hope that you and your dear ones are doing well and keeping safe. While I want to say happy 2022, we all know that this year started with a bumpy ride. Unlike the previous waves, the mortality rate of Omicron variant is low. So it seems like that we are already on the road of recovery. In terms of business impact, there are small continuity issues. People, be it our employees or customers are getting infected, but are coming back with a shorter cycle of 5 to 7 days. That said, till now, for the January, largely our business momentum around asset growth, its quality and other business parameters remain on course. But to give you on an overall sense of quarter 3, we saw a near normal operating environment with the improvement across all key parameters, aided by strong festive seasons and resilient customer sentiment. Hope, you have seen our recently declared quarter 3 results. We have shown a strong performance in the last quarter from deposit to asset, to payments, to digital. Sharing key highlights as under. We launched 69 new touchpoints in this quarter. We hired 2,000-plus people, taking the total workflows plus of 25,000. We have delivered the highest ever growth in deposits, that is 49% year-on-year. Continuing our focus on low-cost stable funds, we have reduced our cost of money by 89 bps in this year. We have maintained ample liquidity throughout the quarter. We disbursed close to INR 8,000 crore of loan in the last quarter, the highest ever in the history of AU. Our balance sheet size grew by 26% year-on-year. Net worth grew by 32% year-on-year, and our capital adequacy ratio is 22%, including 9-month profit. Generated the highest ever operating profit in this quarter. ROA stood at 2%-plus and ROE at 17%-plus. Asset quality is getting back to pre-COVID level. GNPA reduced to 2.6% from 3.2% quarter-on-quarter. Net NPA has also reduced from 1.7% to 1.3%. An important RBI circular on potential norms has brought the NBFC asset recognition on par with commercial banks. This will provide a level playing field for a bank like us, which operate in similar customer segments. We can confirm categorically that the recent cases have no impact on AU Bank as we have been following NPA regulation norm sales 2017 and daily NPA tagging from since 2019. More on this will be covered by my colleagues. The very important update is that we have -- we got our brand ambassador's appeal going on and the uniqueness for our corporates. We have seen extraordinary response for our digital bank, whether it is in terms of increasing brand awareness and the brand consideration score or increase in ETB or NTB and registration on AU 0101 App. The key highlights are around this: all our digital properties have done phenomenally well with 1 lakh-plus credit cards issued, out of which 53% credit card holders are first-time credit card users. And we've also installed 3 lakh-plus UPI QR. Initial trends from video banking experience have been quite encouraging in terms of enhancing reach, acquisition and engagement. AU 0101 continued to see strong traction with 39% quarter-on-quarter growth in user registration. Two lakh-plus nonbank customers also got registered on our AU 0101. I would like to congratulate the team and the customer for this achievement in this time. I also take this opportunity to welcome Shri H R Khan-Sahab, ex-RBI Deputy Governor on our Board as an Independent Director. I believe bank will immensely benefit from regulatory experience of Khan sir, spanning for over 4 decades, and I personally look forward for his mentorship. I would also like to share that we have taken a step towards strengthening our business model by introducing 10 SBUs, of which the details are shared in the presentation. Each business unit will have its own vertical structure supported by a common horizontal across bank support architecture, which will sharpen the focus, enhance the ownership, support with the bandwidth management and lead to a development of new level leadership for the bank. In the coming times, we will arrange the calls with individual business units to give you more color around their working and their strategy. We plan to hold the first of this session on 10th of February 2022. The IR team will share more details in due course. The very foundation of AU Bank was late for empowering the economically weaker sections by providing them better access to credit. We work on a unique formal Robin Hood model by garnering deposits from urban markets and disbursing in core markets. So 76% of our liabilities are coming from urban market and 65% of our lending happens in core market. Our purpose of being an SMB guides us and drives us every day. Continuing our legacy, we have exceeded the requirement of key vaccination guidelines with 86% loan to the priority sectors, 63% loans with ticket size less than 25 lakh and 30% of touch points present at unbanked rural centers. Our commitment to financial and digital inclusion remains unwavering. We are working towards building a society where every individual has access to financial services, irrespective of his/her socioeconomic background. Through our efforts in digital and digitization, we have been able to positively impact the environment by reducing our carbon footprints. Our digital customer onboarding journeys have led to a positive excellence in terms of reducing paper and fuel usage. We have progressively approaching on our accepting diversity of all kind demographic experiential. We've formed a committee on diversity and inclusion and the committee is working towards making AU a more inclusive workplace. The strong governance has been the backbone of our growth in the start of our journey, which has been verified time and again by market's regulatory rating agencies. I'm happy to share that CRISIL's ratings have revised our credit rating outlook from stable to positive during the quarter. This is a strong validation of our banking franchise and asset quality despite the pandemic-induced challenges. Quarter 3 FY '22 marks the completion of 19th quarter as a bank. What a rollercoaster ride: full of excitement, sustainable growth and resilience. The last 8 quarters remained under the weather due to the pandemic, very grateful to the Government of India and RBI for their whole-hearted support in terms of release, reforms and packages. We will continue to invest in our 10 strategic business units and shall always be promising and a likable franchise to be joined by people. Today, we are serving 23 lakh-plus customers as the largest small finance bank, offering over 30-plus products at 80-plus banking touchpoints across 15 states and 2 union territories with a team of 25,000-plus employees. While our journey as a small finance bank was fought with the headwinds like demonetization, NBFC crisis, bank crisis and the pandemic, we believe that what -- whenever things normalize, then this country, this economy, this platform and this team will do wonders. So we remain optimistic with cautious approach, while continuously working towards our purpose of developing the largest retail franchise. So this makes my -- end of my narration. And thank you and stay safe. Handing over to Uttam for his business outlook and his asset strategy. Thank you.

Thank you, Sanjay. Namaskar. Good evening, everyone. Hope you all are healthy and happy. As Sanjay mentioned, our performance in Q3 FY '22 has been consistent and stronger. I personally see it as a reflection of continuous efforts of our team to reposition the bank since the onset of COVID. Seven quarters ago, we took the challenge to take COVID as an opportunity to further strengthen our foundations by redefining our distribution strategy, to gain reach through branch banking and density through digital. Continuous engagement with the customers as solution providers, reinforced and restitched the team to focus and effectively build a more retail and general bank. As we have shared in the past 2 quarters, by gauging the situation early on, deliberating and tweaking our strategy and displaying agility, we have managed to track the market and deliver performance on all business and financial metrics. Our efforts on building a strong retail, tech-led franchise had started to deliver results on all the parameters, be it our focus on CASA ratios, CD ratios, our brand visibility, video banking, our digital bank AU 0101, our credit cards or expansion of our leadership capacity. Aided by good festive season and strong demand across wheels, home loans and business banking, we recorded our higher ever quarterly assessment for the quarter at INR 8,152 crores, up by 33% year-on-year. In line with our narrative in Q1, Q2, we got the benefit of working on the ground and our customer connect and were able to further reduce our gross NPA to 2.6% and net NPA at 1.3% from 3.2% and 1.7%, respectively. Wheels business financed 80,000-plus vehicles during Q3 FY '22, amounting to a total disbursement of INR 3,045 crores, registering a growth of 14% year-on-year and 60% quarter-on-quarter. Personal segment contributed 46% of disbursement, of which 20% were farmers. Tractor contributed 10% of these disbursements in Q3. Total AUM of Wheels is now INR 15,525 crores across 6.7 lakh vehicles and 5.8 lakh customers, registering a growth of 15% year-on-year and 9% on a quarter-on-quarter basis. At AUM level, 60% of the financing is for new vehicles, 25% is used vehicle, 13% is cash on wheels and 2% is two-wheelers. Limited supply of semiconductors continue to constrain the growth for new passenger vehicles despite strong demand order backlog. However, underlying demand remains robust and used vehicle segment continue to be direct beneficiary of supply shortage in new vehicles. Long waiting periods in new cars, affordability and discontinuation of diesel vehicles by major OEMs will keep used vehicle demand buoyant in coming months. In SBL business, demand is still to reach the pre-COVID levels. In Q3, the business saw a year-on-year disbursement growth of 10%, with disbursement of INR 1,629 crores to INR 15,546 MSME businesses. Total AUM of SBL business has now reached to INR 15,283 crores across 1.8 lakh MSMEs, registering a growth of 19% year-on-year and 6% on a quarter-on-quarter basis. Our Housing business currently operates out of 241 branches across 8 states and financed 4,500-plus houses during Q3 FY '22, amounting to a total disbursement of INR 473 crores, registering a growth of 55% year-on-year and 26% quarter-on-quarter. Total AUM of Housing business is now INR 2,099 crores across 22 dwelling units, registering a growth of 113% year-on-year and 24% on quarter-quarter basis. At AUM level, the average ticket size is INR 10 lakhs and average LTV is 50% at the end of Q3 FY '22. The bank has been able to help 9,000-plus customers to avail subsidy under PM Awas Yojana, wherein 4,600-plus EWS LIG-MIG customers have already availed subsidy of INR 100 crores. Our Commercial Banking business comprises of 4 business segments, namely business banking, agri banking, NBFC lending and construction financing. Together, these businesses account for 15% of our AUM and primarily balance sheet-driven lending where we extend working capital financing to MSMEs and SMEs. In Q3 FY '22, Commercial Banking business saw a disbursement of INR 2,215 crores, a year-on-year growth of 139% with strong growth coming in from business banking and agri banking, which saw year-on-year increase in disbursement by 76% and 136%, respectively. We issued more than 50,000 credit cards in Q3 and have achieved a run rate of 20,000 cards per month, taking us closer to top 10 credit card issuers in the country in terms of new card issued per month. I'm happy to share that 31% of all savings accounts opened in Q3 has been sourced digitally via AU 0101 by our video banking channel. Video banking is emerging as an alternate distribution channel with 35% of accounts acquired from non-AU Bank locations and 78% customers are urban with 49% salaried profile. In terms of servicing, video banking channel can provide 400-plus different services and is now handling 750 calls per day. Similarly, AU 0101 continues to see strong traction with 39% quarter-on-quarter growth in user registration and active customers measured as monthly active users has gone up by 38% over quarter 2. Our strategy to build a banking ecosystem around merchants and traders by using UPI QR code as an entry strategy, opening their current accounts and using transactional data to develop analytics based lending is progressing well. Our QR codes are now deployed at 3 lakh-plus merchant points, apart from providing visibility to our brand, this has also helped us to retain merchants accounts, and we have already seen INR 1,300 crores of throughput via these accounts. Our special focus on asset side has been automation, digitization of processes so we can reduce TAT and improve productivity. We have piloted end-to-end onboarding solutions in SBL and Wheels business and solutions are being developed for other business verticals. Our objective to digitize the entire onboard journey of the customer from sourcing to disbursement and maximize the use of digital in servicing the customer. We remain committed to increase our product per customer and are strengthening our products, processes and channels for achieving greater cross-sell using data analytics. All in all, I remain excited, optimistic and look forward to sharing more with you in coming quarters. With this now, I invite my colleague, Rishi Dhariwal, to share his views on the labilities side of the businesses. Thank you. Stay healthy. Stay safe.

Thank you, Uttam, and good evening, everyone. I sincerely wish you good health as we navigate these unprecedented times. I will speak about our liabilities, branch banking and product initiatives -- are being built to make a long-term sustainable retail business. We continue to execute our strategy of boosting the retail mix of our overall portfolio and strengthening the deposit base while achieving an optimal CASA mix. This has been made feasible by enhanced efficiency in the branch banking channel and constant digital innovations, which have made banking with us convenient for our customers. We are driven to build a predictable, stable and scalable liability franchise. We have made targeted efforts to build a high-quality retail CASA book. To provide some context, our monthly Royal and Platinum account acquisition, our premium savings account offerings has increased 89% over 6 months from June '21 to December '21, while our monthly current account acquisitions have increased 38% during the period. 60% of these savings account customers acquired in the year are active on our AU 0101 App and over 76% of the current account customers acquired in the year are active on Internet and mobile banking. While expanding our liabilities book we have been prudent in staffing our branches based on the potential of the geography, thereby optimizing our front-line sales team. While doing this, we have been extremely focused on increasing productivity expectations from every single resource, which has taken our productivity to 6.2 RPC per employee in December '21 and as we like to abbreviate Royal, Platinum and current accounts in the bank from 3.5 RPC in June '21. In the quarter, 1.8 lakh unique debit card holders made over 11 lakh transactions amounting to INR 320 crores, reflecting an increasing trend of customers using our bank card for making their purchases and thereby transitioning to use of AU Bank account as the primary account of the customer. Our customers bought close to 25,000 insurance policies through our partnership with ICICI Prudential, Future Generali for life insurance and Aditya Birla Care, Tata and Chola for general and health insurance. We have also -- we have more than 51,000 cumulative 3-in-1 trading accounts through our partnership with Motilal Oswal Financial Services. The AUM of our mutual fund investments done by our customers has grown by 13% during the quarter. Number of transactions being done by customers with us is a clear measure of the engagement as well as indicator of potential to buy further products from us. We have 68% and 52% of our CA and SA customers, respectively, regularly transacting with us with 60 and 23 average customer-initiated transactions for CA and SA accounts, respectively, for the transacting customers. To ensure that the customers are fully embedded with us, we provide them with full range of payment investment and insurance solutions, namely debit card, e-comm and POS activation, UPI, bill payments, and Fasttag, SIP, 3-in-1 asset products, life and health insurance. We have 59% of our current account and 36% of our savings account customers use 2 or more of our products. PPC has risen to 1.93 in December '21 from 1.34 in March '21 for CA customers and for -- and to 1.5 from 1.37 for savings account customers. Of the 9.6 lakh registered users on the AU 0101 Super App as of December '21, over 6.9 lakh-plus customers are liabilities customers. We recorded over 37 lakh transactions in Q3, a 30% increase from Q2. We launched the AU Shopping Dhamaka campaign in October 21. Over 1.2 lakh customers participated and made 6.85 lakh transactions spending close to INR 260 crores. We observed significant improvements in customer balances during the campaign and thereafter as well. We have initiated our expansion to geographies where our presence was lower previously so that we can cater to customers across more and more geographies and serve them with our 21st century banking services. We will provide you more update in the coming quarters on the same. Next, my colleague, Vikrant, will provide an update on asset quality. Thank you.

Thank you, Rishi. Good evening, everyone. I will be giving a brief perspective on asset quality. Most of the businesses saw increased activity during the quarter, which resulted in better customer cash flows. We saw correction efficiencies north of 100% during the entire quarter. In quarter 3, we saw a conducive environment and all restrictions imposed by various state High Courts were lifted and this aided in faster implementation of legal recourse. Average collection efficiency in quarter 3 was 106% compared with 109% in quarter 2. Customer activation improved to 91% in quarter 3 compared to 90% in quarter 2. Our gross NPA reduced by 57 bps from 3.2% in quarter 2 to 2.6% in quarter 3. In absolute value, there was a net reduction of INR 94 crores from INR 1,151 crores in quarter 2 to INR 1,058 crore in quarter 3. Net NPA reduced by 1.7% in quarter 2 to 1.3% in quarter 3. We saw a gross reduction of INR 343 crores in quarter 3 from quarter 2 closing NPA of INR 1,151 crore, resulting in 30% resolution during the quarter, wherein 70% resolution happened through repayment, about 20% resolution happened on account of security disposals and 10% was on account of technical write-offs. If we further introspect the current NPA pool of INR 1,058 crore, we have enforced security on approx 10% pool and asset is in bank's possession. As on date, we've initiated legal recourse, either separately or Section 17 arbitration on 84% pool. On balance 5% pool, we will be initiating legal recourse soon. In nutshell, all the underlying loans are granular and secured, and we expect recoveries or security enforcement in due course of time. As we had communicated in our Q2 commentary, basis on-ground feedback, we have identified nonworkable pool, wherein all collection efforts have been exhausted and bank has done technical write-offs of INR 39 crore. Here, collection efforts are being abandoned and future recovery may happen through ongoing legal proceedings. We shall continue to evaluate such nonworkable pool in future as well and take appropriate measures. Out of total gross advances of INR 40,700 crores as of 31st December, 61% of book was originated after March 2020. I reiterate that 61% of the gross advances have originated post onset of pandemic and 92% of this book is current and contributes only 0.44% of our GNPA. The resilience of this book has validated our approach of underwriting and customer segment we cater. As on 31st December, standard COVID restructured book stood at INR 1,263 crore, which is 3.1% of our gross advances. Billing has started on 92% of the restructured book and 9% of billed book is NPA as of 31st December. Asset quality performance in the billed pool has been within expectations. ECLGS gross advances as of 31st December stood at INR 873 crore. On the provisioning coverage, Bank is carrying provisions of INR 537 crores against gross NPA of INR 1,058 crore, with PCR of 51%. Additionally, base provision of INR 205 crores against standard restructured book. Furthermore, bank continues to carry contingency provision of INR 300 crore, which stands at 75 bps of our advances. This further strengthens balance sheet and makes us better prepared for any unforeseen events. Keeping NPA resolution trend of first 3 quarters, where 65% of NPA resolutions has happened through normalization with no POS loss incurred and only on remaining 35% pool security enforcement or onetime settlement was done, wherein there was POS loss of 32%. Therefore, we feel confident that PCR of 51% is quite likely to be more than sufficient to cover any credit loss arising from this portfolio. Over and above this, bank is also getting contingency provision for any unforeseen slippages and specific provision against standard restructured asset. However, we continue to remain cautiously optimistic as there is still little uncertainty on the situations which might emerge post third wave. Thank you.

Nirav, we can open for questions now.

[Operator Instructions] The first question is from the line of Bhavik Dave from Nippon India Mutual Fund.

Two questions. One is on the margin. So I see the incremental spreads are a little lower than what we were reporting in the last quarter. Just want to understand how are the margins have been on a 6.3% range for like 2 quarters now. Just want to understand incrementally with cost of funds benefit now it seems that incremental cost of funds are flattened out at 5.3% and with rate environment being like on the other side, what is a margin spreads that we'll be comfortable working around? So is it 6% to 6.3%? Or what is the kind of margins that we will be happy to...

Bhavik, Prince here. Your line is not very clear.

Okay. Sorry, am I audible now?

Yes.

Okay. Sorry, my question was regarding the incremental spreads that we see that they have come off by 20 basis points during the quarter. And however, the margins have remained flattish at the 6.3% mark, wanted to understand what is the sweet spot that we look forward, considering the cost of funds incrementally have normalized at 5.3-odd percent, incrementally. How -- what should be a comfortable margin run rate that we would be happy to work with? Like is it 6% to 6.3% or will it be okay to work at a lower margin as well? Just wanted to understand that.

So Bhavik, Sanjay, right? So this time, I think because of our cost of money going down and investment also getting moderated, we've gotten upside around NIM, right? But I don't think that 6.3% is a sustainable NIMs for us. We want to target around 6% or 5.8% to 6% in the longer run. And we also have to see that how the interest rate cycles also moves from here, right? So there is a risk on it. But we have the ability to lend on a higher rate too because we are into retail asset. So I hope that you can manage this NIMs around 5.8% to 6% range in the long run.

That's helpful. And second question is regarding the cost -- so operating cost. Slide 21 is very useful, wherein the INR 157 crores that we are doing for investments for future. Just wanted to understand -- and some part of the 50% of it seems to be towards the newer businesses that we are incubating. So that might sustain for maybe a few more years because that's a growing business, but out of this INR 150-odd crores, it might be like INR 180 crores, INR 200-odd crores for the year, how should we think about it for the future, right, like FY '23 or like within that. Is this the number -should the number be around INR 150 crores, INR 200-odd crores or this will relevantly increase with our investments because the businesses that we are trying to grow from? So just wanted to understand that.

Yes. No, Bhavik, I completely understand. So as an executive, we need to take lot many decisions around your metrics, right? So -- and as already commented in my earlier, say that we are looking to higher NIMs, reducing our cost, building retail a deposit. So this 1 OpEx, we are not so much focusing as of now because of the one because we were going to a pandemic and the quarter 1 was completely wasted out. There was capacity buildup in the organization, which was not used. And we also want to try lot many things around digital because if you can't -- if you don't do digital initiatives, we might not be there after 10 years, right? So I strongly believe that AU needs to invest in more in TAT, more in distribution, more in other digital initiatives and of course, building the brand. So I presume that on the scale, this amount will go up, maybe around like this year is around INR 150 crores, maybe next year, is around INR 200 crores, INR 250 crores. But we want to keep this investment going on because ultimately, this will make AU the journey forever. Yes, so I'm not too worried about the cost of income here.

[Operator Instructions] The next question is from the line of Amarnath Bhakat from Ministry of Finance.

I just need to understand this, the rapid speed of increasing of this credit card issuance. Last quarter, you say around 50,000 cards have been issued. And we all know this credit card is an unsecured business. Can you by fundamentally, say, generally targeting the secured kind of business. I'm just trying to understand what the business strategy of increasing this credit card, which is mostly unsecured in a highly populated area, where not many big banks and other institutions are there. What is the strategy here? That's my first question.

No, no, good question. So I think the detailed presentation is being done on 10th of February on our strategy around credit card. But I'll give you some brief highlight around it. Like for us, -- for me, personally, credit card is one of the most important digital payment method, right. So if you don't have a credit card in system, then many people don't like you as a bank, and we witnessed it in first 3, 4 years of our journey. So it was a kind of compulsory for us to launch credit card to make people believe that we want to really become a digital bank in that sense. Second, this is more of an acquisition strategy for us, right? Because a lot many customers don't want to bank with SMBs. But credit card gives us the advantage that we can offer them up better credit card, and then they become our customer, and then we can become their primary banker, right? And third, your understanding of the subject that we can't handle unsecured, somehow someday, we need to start that, right? And credit card is relatively a better product to start and secure because here, maybe only 5% to 10% of your outstanding book becomes an EMI book, right? Otherwise, customers generally pay on time. And we charge around 36% if customers revolve the line, right? So there is enough cushion available to us in case any default comes. But as of now, in last what 6 months onwards, our data says that we are absolutely on track. And 1 more data point, like we are issuing around 70% cards to our ETB customer, right, who has a travel card or who has some data points with us. And 30% is only around these NTB, right? And 1 more data point for you that 70% cards are issued into the semi-urban and rural areas where there is no leverage. Sorry? So having...

Your voice is cutting in between. Sorry.

I'm sorry. So 70% credit cards are given in the core markets of ours, so where we have the lot much collection efficiency, right? So I think these are the data point which makes us more comfortable. And we really want to invest more and more in this credit card because as we move forward, we also have seen that people generally want to use credit card over the debit cards because debit cards open up their risk on the cyber, where the credit card has a limited risk on their hand, right? So -- and we are more bullish on this subject. We -- it has been built by one of the finest professionals in AU Bank with our ex-CRO Mayank Markanday so -- and he's handling -- he is building the team very beautifully. So I hope that this will become one of the most important business in times to come.

And my second question, sir, see, as we all know that the entire world and of course, India will now move towards the higher interest rate regime. Today or tomorrow, RBI will have to increase the rates. But 1 good thing AU has done that in the last few months and quarters, they built up a very huge CASA franchisee, and I'm sure they are more of -- they will be all at a kind of a permanent customer. Now what's your thought process as the interest rates increase, our lending side, the yield probably will increase, whereas my cost of borrowing, if it is mostly coming from CASA, especially the old CASA up to December '21, my net yield is supposed to increase going forward, provided that the interest rate cycle really takes off sometime in this 2022-2023. So what's your thought process here? I mean just to add on this. Am I to say what is this reported India CASA will also be having the infusing interest cost if the interest cost will be increased? So net-net how the bank is going to get benefited?

Yes. So I think lot many questions in 1 question. So I would say that everybody is predicting that there will be an upside in our interest rate cycles, but you will appreciate that AU is in the markets of lending, where generally we have the ability to pass on the interest rate upside to the customer, right? We have actually reduced the -- our lending rate by close to 150 basis points in last 3, 4 years. Because we were getting the advantage around interest rate, right? And this -- generally, market are being dealt by NBFCs, right, who lends them at a higher rate. So that's the whole advantage with us that in case interest rate prices move up, we have that possibility to transform the rate to the customer and make ourselves on a similar NIM number. And further, you will see that our interest rates still we are offering around 7% on our bracket of INR 25 lakh to INR 1 crore, that can also be adjusted to really make your cost of money less or cheaper. And of course, at a scale because this may happen in next 2 years, the scale will also help you in managing your operating expense. So I think these are 3, 4 reasons where we believe that AU still is protected around any interest rate cycle upside.

And maybe I will take 1 last small question. The absolute -- though the GNPA as a percentage has been reduced, but the absolute value of the GNPA has reduced from INR 1,151 crores to INR 1,058 crores, that's an INR 94 crore reversal only. If I take it the last quarter, the GNPA was reduced sequentially by INR 345 crore compared to that in this quarter, it is reduced by only INR 94 crore in absolute value. Now what does it indicate in terms of the recovery from those GNPA?

No, no, no. I think you would appreciate that last quarter, the quarter 2 and quarter 3, quarter 2, we commented in our call that it has a lag effect of good 6 quarters. We started doing the enforcement of security last quarter itself and people were coming up and paying up. So that was a phenomenal quarter for us in terms of receiving NPAs. But you'll appreciate that our assets are around 14%, our retail assets are around 14% yield. And we also in the similar customer segment where other players also operate. If you compare our NPAs to them, you will see that how better we are doing in terms of our asset quality, right? And slowly, slowly in a pre-COVID level also our NPA was around -- gross NPA was around 1.6%, 1.7%, right? And we are now just away in terms of that number just 1% away, right? So in my opinion, next 2 quarters, if everything remains good, we'll be touching that number again, right? So I think that slowly, slowly, we are getting at that level, and that is good enough for us to remain happy and see how well we are progressing in that terms.

And are you happy with this net PCR of 50%, 55% or you also target that provision coverage by more? Or you have...

No. I -- you will appreciate that if you really see our net credit loss historically, it remains around 15% to 20% of our gross NPA, right? And we are keeping around 55% -- sorry, 50%, north of 50% in GNPA. And plus, we have a contingent reserve of around INR 300 crores to -- for any unforeseen. So we are very, very comfortable in keeping PCR around this number.

[Operator Instructions] The next question is from the line of Hiral Desai from Anived Portfolio.

Congrats on the quarter. And like Bhavik here, we appreciate the information on operating expense in Slide #21. So...

Hiral, sorry to interrupt you, may I request you to speak a little louder, please?

Is it better now?

Yes, yes, yes.

Yes.

Yes, Sanjay. Congrats on the quarter. Thank you for Slide #21, and additional disclosures on operating expense. I appreciate that. So I had a couple of questions. One was fees -- net of the processing fees. So if I look at the noninterest income, net of the processing fees, how should one look at that number over next couple of years? Because we've now started issuing credit cards, we've scaled up distribution partnership on insurance, MF, DMAT so -- and the franchise is obviously expanding. So how should we look at that number? Because obviously, the loan processing fees is picking up is because it's the -- sorry?

Sorry. Go ahead.

No, I'm saying the loan processing will obviously pick up with the disbursement, but net of that, just wanted your thoughts on all the other pieces?

Yes. So we are building a franchise around now cross-sell around insurance, investment, you will appreciate that 2 quarters back, we got our merchant, again, classifying as priority sector, and we got the PSLC income last quarter too and before quarter that also. So I think the PSLC income, the cross-selling around insurance, investment and trade. These are the 4 things which we are working on. And of course, there is still an issue of continuity around it because of pandemic. So how much if we can go up we would love to only comment when things become normalized, right? And as of now in whatever quarter we get the opportunity, we want to use that. But on a larger traction that how much it can be a part of our total income, we really want to go back to drawing board maybe in the month of April once the stability is there, right? And of course, loan processing and other income is directly related to the business numbers, right? So that will go up if the business goes up.

Fair enough. The other question that I had was in the housing where you had INR 900 crores on disbursements in 9 months. What would be the split between new loans and balance transfers?

Uttam, do you have a number of this? This is very specific -- yes?

So balance transfer is very marginal, around 7% to 8% only. Because the new franchise, so it's largely NTB customers or costly to my existing customers. Balance transfer is not too much in this.

And sir, what will be the percentage of existing AU customers within this? So let's say, your Wheels and MSME customers who have been given housing loans?

No, largely, as I said, is NTB. Again, ETB would be around 15% only, largely to NTB only. Since a new franchise, a new team, yes.

Got it. Got it. And Sanjay sir just had 1 request. Since you are sharing so much of information on the liabilities side, if you could sort of put it in the PPT, it's difficult to track on a call. So just add that 1 request and all the best for future quarters.

Sure, thank you.

The next question is from Amit Nanavati from Nomura.

Question on credit cost outlook, right? Nine months basically in these 3 quarters, and this is wave 3 impacted year. We kind of average around 60 to 70 basis points of credit cost, right? And provision cover of upwards of 50% versus 15% to 20% kind of LGDs that we experience, right? So to that extent, and now NPA is also back to near normalized level. Where do you think is credit cost? Has it bottomed out here will be 50, 60 basis points or you can see some reversals also at least for the next 1 year?

Difficult to answer brother because still we are going through COVID 3. If you ask me that if there was not COVID 3, I would have said that we would have bottomed out in terms of gross NPA and the kind of losses we have, which is around 0.3%, 0.4%, you're talking about 0.5%, but ideally it would have been 0.3% to 0.4%. In the pandemic, it would have reached not more than 0.5%. So I would say, let's wait for this quarter more to have more clarity that how can be next year in terms of NCL. Otherwise, I'm very hopeful that we have largely covered our -- any kind of risk in asset by creating lot much contingent provisions, buffers and by providing the -- any kind of losses we are debiting the P&L, right? We're not using provisions. So largely, we are covering ourselves in a way that no unforeseen circumstances should challenge us. But I would say around 0.4%, 0.5% is the amount I'm looking for.

Okay. So that's the net credit loss, Amit. I think from a credit cost perspective that would be in line with our historical range of 70 to 90 bps.

Got it. Got it. Secondly, just if you can just point out the customer, new customer addition in Wheels and SBL portfolio in the last 1, 1.5 years, that will be helpful.

Was your question the new customer additions in the Wheels and SBL portfolio?

Yes.

So I think Uttam-ji's speech covered that. Broadly, given that there has been a pandemic and business hasn't been good, so I think the growth in customers could be in line with the growth of -- we don't have that specific number as of yet in terms of growth, but the number of customers is already articulated by Uttam-ji. I think around 5.5 lakh customers -- 5.8 lakh customers on the Wheels business and around 1.8 lakh merchants on the SME -- SBL business.

Basically, I just wanted to understand of the incremental disbursements that you have done in the last 1.5, 2 years now, right? 61% is newly originated in the pandemic era. How much of that would be existing customers? How much of that would be new customers, please?

Broadly, it will be NTB here, Amit. And data-keeping question, if you can write to us, we can respond back to you if there's anything specific.

I'll do that. No problem.

The next question is from the line of [ Arvind ] from Kotak Mahindra Bank.

Yes. So my question is on the next triggers for ROE now that we are in the mid-70s, high-teens and given that we are already kind of north of the targeted NIM ranges of 5.8% to 6% the cost to income is not going to moderate in the medium term at least and credit costs over the last couple of quarters have been broadly in range. So where do you see the ROE going from here? Have we achieved where we want it to be or are there other triggers that we are pondering there?

So [ Arvind ] your question -- I mean, we -- you are not very audible, but if I understand your question correctly, what you're saying is that we have reached the ROE of 17% in this quarter and where do we expect it to be in terms of a long-term average. Is that the question?

Yes, yes. Given that your 3 triggers for an upward re-rating NIMs cost to income and credit costs are broadly in the stable territory.

We will wait for one more quarter.

[ Arvind ], you have to wait for one more question because as we are commenting that this quarter has 1 or 2 exceptional items because of lagged effect, and we need to have a normal quarter in terms of our investment book, in terms of our credit cost, in terms of our productivity. So I think -- and let's get this COVID 3 also over from our side. And then only we can comment because very, very uncertain environment with very unpredictable metrics around us. So please bear with us and we'll come back by April to figure out what is the right ROA and ROE for us.

Understood. My second question was on the credit to deposit ratio and the liquidity coverage -- the high liquidity coverage ratio that you are sitting on. Given these comforts and the fact that you yourself pointed that you have headroom to reduce the cost of deposit in some buckets. Do you see -- can you guide us to some glide path on the -- in the rate of interest or the cost of funds going forward? We understand that there is an external environment of increasing interest rate [indiscernible] but do you decide -- do you have any targets for some kind of sense on quarterly reduction in the SA race in particular?

So we actually decide every year, but this is very unpredictable, it's not in your hands, it has to be market-driven approach. So I would say our team has reduced the cost by a good 90 basis points in 1 year. And in total, 18 months, we would have reduced by 150, 160 basis points. So in that sense, we are absolutely on track. And because we had that high cost money which got paid during the year, during the period. So I would say if interest rate cycles don't go up, you will see some sort of reduction. But if interest rate cycles goes up, we have to price our deposit again. And -- but the best part in AU is this that we have the ability to transform to the customer -- the end customer because again, our customers are retail, those are more in core markets. And in those markets, we compete with NBFCs rather than in formal banks. So that is our advantage, right?

So [ Arvind ], Yogesh here. And 1 additional point that my incremental cost of fund is around 5.3% as of now, whereas my AUM cost is 6%, right? So still I have 70 basis points runway going forward, right? There my AUM costs maybe in medium to long term can be around my incremental cost despite if we take incremental interest rate. So if we take that into picture, still I have some cushion in my cost of fund going forward.

[Operator Instructions] The next question is from the line of Nidhesh Jain from Investec.

So firstly, are there any plans to raise capital given we have reached Tier 1 of around 18%? And what is the threshold level of Tier 1 beyond which might you raise capital?

Yes. But we appreciate that this year's profit, if you add on that, then our capital adequacy is around 22%. And by April, it will be hanging around 20%-plus, right, with largely supported by Tier 1. So we will take the call at appropriate time because once we complete this quarter, and we see how the environment is at that time, how much you can do next year and how much money we have. So I think larger call will be taken maybe around April. And -- but as of now, we are absolutely very comfortable around our capital adequacy.

Sure. Secondly, sir, what are the plans to apply for universal bank license? Any timelines, indicative timeline for that?

No. No, honestly, because we will become eligible by next quarter, but I think it's more of a Board and a shareholder decision. And ultimately, the regulator has to approve it. So we are not in a hurry. We are taking quarter-by-quarter. So let's finish quarter 4 first and then think what we should do for in coming years.

Sure, sir. And sir, lastly, on the growth, sir, the growth has been quite broad-based in this quarter. And in the Wheels segment, what has driven this growth? Because if you look at the key segments where we operate, we have a large share of passenger cars as a key segment. There, the industry has been showing weak numbers, so what has drove the growth for us in this quarter? And probably if you can share some data around the used vehicle financing, like we've done in this quarter versus previous quarters. Is that the reason which drove the growth this quarter?

Yes, Bhaskar you are there, our Chief Executive must be there on the call.

Yes. Sorry, if you can just tell me the question I just was -- I had dropped out. So if you can just repeat the question, please, [ Arvind ] (sic) [ Nidhesh ].

So Bhaskar-ji the question is around what has been driving the Wheels growth in terms of segments of customers as well as the segment of cars?

Okay. So essentially...

Especially in the context that the new car sales have been weak from an industry perspective.

Yes. So essentially, what has happened is what has driven the -- what has given us volumes is the personal segment because that is where -- that was something where we had -- in the past, we were not very strongly present in that segment. And obviously, with the bank platform, you get that opportunity to get into the personal segment. And with the kind of space that was available with the NBFCs being a little slow, that also does give you a little more headroom in the new car spaces, number one. Number two, also the fact that there was some movement with Tatas, there were some moment with Mahindras. So while essentially in the past, if we were a little more focused on Maruti, the fact that we were able to move ourselves across manufacturers and across dealerships also gave us an additional room on the upside. On the used car, once again, because the distribution network being available, we were able to approach the organized channels a little more, the unorganized channels, we did a little more activation. So all in all, it was a strategy where we actually expanded ourselves a little more horizontally so that we were able to reach out to more distribution points. And from there, we managed to pick up a little more from whatever that we were doing in terms of -- and obviously, we did a little more of tractors, we did a little more of used vehicles and all those -- a combination of personal, commercial, tractor, used all of that helped us get to our number.

Sure, sir. And sir, just 1 last question. In terms of distribution expansion, which could be the key states that we are thinking about over the next 2 to 3 years to drive growth? I see that UP and Bihar are the 2 large states, which is very popular and probably the competitive environment also will be relatively benign. I don't hear any large player operating in that segment -- operating in our segment in those geographies. So what are the plans to expand distribution over the next 2 to 3 years?

So it is on the Wheels side, already getting laid down. The plan is getting laid down. In fact, people are being interviewed, and we are positioned to set ourselves in the next year with the new states as well. So we will definitely do whatever we have learned over the last 20 years in that business and expand it to the states. And obviously, we have the parentage of the Mahindra, Maruti, Hyundai people also wanting to -- they will also support our going into those states because it does work for them as well. So...

Yes. And Nidhesh, if I can just add, as Sanjay-ji announced, we'll be holding a separate -- each SBU will be coming and presenting to you and all the other investors and analysts. So maybe we can have a more detailed discussion around wheels in that session.

[Operator Instructions] The next question is from the line of Renish Bhuva from ICICI Securities.

Congrats on a great set of numbers. My question is to Rishi, sir, about the PTC numbers which he shared on the current accountholder as well as savings accountholder. So sir, basically, when we look at the PPC, how we look at? I mean we look at asset to liability or we look at liability to liability?

No. We are looking at all the products of the bank, like what I said that we are looking at customer using a POS machine or a QR or SIP, 3-in-1, asset products, life and health insurance. All of these products are included in the calculation of PPC.

Right. So when you alluded to this 1.9% PPC for the current accountholder, what could be the major product, sir, over here? I mean any idea?

A good number of customers would actually be using our QR and POS machines.

Okay. And on the savings side, sir? In the savings side it's 1.3x?

Savings side is a mix of products. So many of them have a loan from us or they would be investing through us. Like I said, we have more than 51,000 3-in-1 accounts. So some customers would be making their investments, many of them would have insurance with us. So all of that gets counted for the PPC for savings account customers.

Got it, sir. Got it, sir. This is helpful, sir. Sir, my next question is on the credit card. So if you can share some customer profile be it in terms of salaried, self-employed. And more importantly, it is self-employed ETB, then the credit card is generally offered to the proprietor or it is offered to the other number of households?

Sorry, if you can repeat that question, Renish, once?

Yes, sir, so my question is the customer profile for the credit cards. So first, I would like to know the breakup between salaried and self-employed and within self-employed, if it is ETB, then generally, what is the strategy? I mean do we offer the credit card to the proprietor of owner of that unit or we try to sort of leverage that relationship by offering credit card one of the member of the ETB customer?

So yes. So I'll give you some -- Sanjay here. So I give some data point around it. Like we are issuing a 70% card to the ETB of bank and largely we are self-employed with customer bank, right? So that means that majority of cards are issued to the self-employed people, and those guys are more of a proprietor of their own shops and own enterprises and 70% accounts -- 70% credit cards has been given to the core markets, that means the customers are not that much leveraged. And our card becomes 1 of the first cards for them. Our average spend is around INR 17,000 per card per month. So that is also showing up very well. And so -- and the detailed discussion on this is on 10th of February, where Mayank Markanday, our ex-CRO who is running this business, will showcase his whole data on the subject.

Renish, just that data point in terms of salaried and self-employed mix that mix is 55-45.

65-35, right?

55-45, approx.

55 self-employed, 45 salaried, is it?

55% salaried and 45% self-employed.

The next question is from the line of Himanshu Taluja from InFina Finance.

Just firstly, firstly sir, one data-keeping question, if you can just repeat what is the Wheels breakup in terms of the new and leased if you can share that.

So that Uttam-ji already covered in his speech, almost 50% is new, 25% is used, 13% is cash on wheels -- sorry, 60% is new, 25% is used and 13% is cash on wheels.

Okay, sure. And sir, secondly, what is your actual game plan is on the credit card? Because if I look at this product, this product is more a product of a metro or an urban market, whereas -- where most of the other top players are focusing on. Whereas if we look at our presence or our focus market is more sort of a rural and semi-urban. So how do you plan to move forward what is the actual plan on this? You just wanted to have this product more for our liability customer or how you want to leverage this product?

No, no. I think you -- because we are commenting that on 10th of February, we will get the whole color around it. But to give you some data point around it's just that this is a very new product for us. So our focus is on the -- our ETB base. 70% cards are given to the ETB base and 30% are given to NTB. NTB generally are from the urban markets, ETBs are generally from core market. 70% are given to the semi-urban and rural areas so that card is their first credit card and the customer is not leveraged. And because of evidence of so much POS machines in those areas, our card is being used extensively now. So our strategy will evolve with the time. But as of now, it's one of the projects where we feel it's very important to become a digital branch, right? And credit card is 1 of the most important medium to do digital payments. So we are pushing as of now on a very conservative note. But as we move forward, I believe this will be an acquisition strategy for us for very urbanized customers.

Ladies and gentlemen, there is the last question from the line of Nitin Aggarwal from Motilal Oswal.

Congratulations on good results. Sanjay you mentioned in opening remarks about the change in ample recognition norm for NBFCs that will help in the level-playing field. So just wanted to understand like are you already seeing a positive impact from this on the ground? Any qualitative comments around this?

Nitin, you have to help me out to get with the other similar market operator numbers because what we were saying over the years that for us, a 90-plus DPD versus an NPA classification was a different trajectory, right? But we've managed this transition very well, and this transition very well in the last 4 years. And we were tagging NPA on a daily basis, our NPA rollback was not easy. So we are seeing other companies now coming and building that similar kind of practice, which is actually helping us because previously no NBFC, no HFC were looking to get the whole EMI as repayment, right, at the time of default. So now it's a level-playing field, and we are very happy that our practices and other operator's practices are now similar. And customer is also helping us in all sense that this is the way to go forward, right? So I think this is for us a level-playing field. You can contain now our asset quality to a similar customer segment operator asset quality.

Sure. And second is on the contingent provisions. There was -- see, we have stated that our restructured provisions are good enough, and we don't need to provide more there and our recoveries continue to remain very strong. We have like 15%, 20% LGDs against an 51% coverage. So what do we plan to do with contingent? Will we look to like hold them on the balance sheet or would we look to reverse them and increase coverage? So what is the outlook that we can [indiscernible]?

So important question, Nitin, but I'm sorry, I'm not able to give you answer in this quarter because we were doing some calculation in this quarter, but suddenly this Omicron came, right? So we really want to see how long this can be and God forbid, no other unexpected COVID comes back, right? So we really want to play safe here. And we'll see how we comment on this in next quarter.

I now hand the conference over to Mr. Aseem Pant for closing comments.

Yes. Thanks, Nirav, and thanks, everyone. On behalf of the entire AU family, I would like to thank you for joining us in the call. Please reach out to the IR team if you have any further questions. Thank you.

Thank you so much. Thank you so much.

Thank you. On behalf of AU Small Finance Bank, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.