AU Small Finance Bank Limited ($AUBANK)

Ladies and gentlemen, good day, and welcome to the AU Small Finance Bank Q4 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prince Tiwari, Head of Investor Relations. Thank you, and over to you, sir.

Thank you, Sagar, and good evening, everyone, and warm welcome to AU Small Finance Bank's earnings call for the fourth quarter of financial year 2025-'26. We thank you all for joining us this evening. On today's call from the management, we have our Founder, MD and CEO, Mr. Sanjay Agarwal; Deputy CEO, Mr. Uttam Tibrewal; Executive Director and Chief Credit Officer, Mr. Vivek Tripathi; our COO, Mr. Yogesh Jain; CIO, Mr. Ankur Jain; and our newly appointed CFO, Mr. Gaurav Jain and the IR team. As we made the announcement today, Mr. Gaurav Jain has been appointed as the CFO of the bank, and I take this opportunity to congratulate Gaurav on his appointment. We'll start today's call with a 15- to 20-minute opening remarks from Gaurav, highlighting the bank's performance, positioning and outlook. We'll then follow it up with a open Q&A of 40 to 45 minutes from the participating analysts and investors. For the benefit of all participants and so that we can take everyone's questions, we would humbly request to restrict to the queue. With that, I now request Gaurav to kindly take us through his opening remarks.

Thank you, Prince. Good evening, everyone, and thank you for joining the call. It's a pleasure to welcome you all to our earnings call for the fourth quarter of FY '26. On 19th April, we completed 9 years of our banking journey, and I would like to take this opportunity to thank all of our stakeholders for their continued trust and support. As we enter the decadal year of our operations, we continue to focus on our core philosophy of sustainable growth and achieve our long-term objective of building a forever bank. Coming to the operational highlights for the quarter. Let me start with the operating environment. Geopolitical tensions in West Asia continue to weigh on global energy prices, currency market supply chains, elevating overall risk sentiment. Indian macroeconomic environment, whilst relatively on a better footing, did see volatility across currency yields and business sentiment towards the latter half of March. As a retail-focused bank, we have no meaningful exposure to borrowers directly impacted by trade or supply chain disruptions. However, we remain watchful of the second order effects, particularly fuel prices was through into inflation, consumption and credit. Amidst this environment, we delivered a strong quarterly performance, helping us to finish the year on a high note. Deposits growth remained strong at 10% quarter-on-quarter and 23% -- quarter-on-quarter growth, led by MFI and personal loans. On a Y-o-Y basis, unsecured portfolio declined by 1%. Margins expanded by 24 basis points quarter-on-quarter to 5.96%, led by a decline of 12 basis points in cost of funds basis points benefit from lower gross slippages and higher NPA resolution and around 7 basis points seasonal benefit from lower day count in February. Cost-to-assets ratio continues to improve despite ongoing investments in manpower, distribution, standing and technology. Excluding CD SMU premium, cost-to-assets ratio for full year declined by 19 basis points to 4.1% from 4.3% in FY '25. Including CG SME premium, cost-to-assets ratio was lower by 16 basis points to 4.2%. Asset quality saw continued improvement led by normalization in unsecured portfolio and seasonal seasonal improvement in secured assets. Slippages declined by 17% quarter-on-quarter to INR 659 crores, leading to GNPA ratio declining by 27 basis points to 2.3%. Credit costs for Q4 declined to 0.6%, whereas credit costs for full year came at 96 basis points of average assets. Credit costs inclusive of CGF premium was around 1% of average assets for the full year. Profit for the quarter grew by 25% quarter-on-quarter and 65% year-on-year. to INR 832 crores with ROA improving to 1.8% for the quarter. Profit after tax for the full year grew by 25% to INR 2,641 crores, with ROA improving to 1.6% and ROE at 14.2%. Now let me briefly update you on some of our strategic initiatives. First, on the universal banking license. Pursuant to the bank's request, the RBI has amended the NOFHC requirement, which will now apply to the transition universal bank only if the bank or its Promoter Group proposes to establish any group entity in the future. Following this amendment, we filed the final license application in March '26 and await regulatory approvals. Second, on the succession planning. The Board and executive management continue to invest in increasing the leadership depth, and we had made certain announcements during last quarter in this regard. To further update, RBI has approved the extension of our MD and CEO, [indiscernible] tenure for 3 years until April 2029. Our Deputy CEO, Uttam, completed his term as whole-time Director in April. He will continue in his capacity as Deputy CEO, leading the bank's retail business verticals and increase his focus on on-ground engagement to drive growth, strengthen customer relationships and expand the bank's presence across newer geographies. Our Chief Credit Officer, Mr. Vivek Tripathi, has assumed the role of Executive Director for a term of 3 years following RBI approval. Third, on operating efficiency. There is a great degree of focus on driving operating efficiency over the medium term through multiple structural interventions. One of the key levers is Agentyink AI, which provides an opportunity for us to completely reimagine our customer and employee-facing journeys, and we are systematically integrating Agentink AI capabilities into our core operations to make it exciting and easier for our customers to bank with us and faster for us to service them. We are also realigning our organizational structure by consolidating businesses, eliminating parallel hierarchies and reducing redundancy. For example, agri business is now merged with business banking and home loans and MBL businesses have started sharing back-end teams. We are also working to flatten our sales hierarchy, expand managerial span of control, enabled by real-time data visibility. Whilst driving these interventions, we continue to invest in scaling our franchise by adding to the sales team, expanding our distribution and investing in our brand. Fourth, on our tech initiatives. We are embedding AI decisively into our core operating model. This is not an incremental adoption. It requires us to fundamentally reimagine how we operate, scale and serve our customers by delivering superior customer experience, higher productivity and scalable growth without proportional increase in cost or headcount. Our tech road map focuses on adopting an enterprise-wide aggenty AI platform, developing AI use cases on our data platform, driving process automation and lastly, keeping our core architecture modern. First, on the Agentic AI platform. We have implemented a deterministic rule-driven agentic AI platform built for high-speed, personalized customer engagement with full end-to-end traceability and auditability. By removing the friction of fixed digital workflows, this platform empowers our team to serve our customers' needs more effectively and expand product reach at lower cost. Our first AI native loan origination system built on this platform went live last week for our gold loan business. We are now actively expanding this agent platform to mortgages, commercial banking, wheels, personal loan and credit card LOS journeys. In parallel, we are building a model-agnostic multilingual platform for customer service, enabling deeper customer understanding, end-to-end lead management and enhanced cross-sell efficiency. To sustain and scale this transformation, we are establishing a center of excellence, bringing together internal talent, global partners and cutting-edge capabilities to identify and implement AI use cases across the bank. Second key initiative on the tech side is around data engineering and AI-based analytics use cases. The bank has built a unified data platform wherein most MIS and dashboards have migrated to this automated platform, and our internal meetings are increasingly being conducted leveraging this platform, improving time lines and decision-making. Building on this foundation, we are deploying AI and ML across credit underwriting, fraud decisioning, collections and customer service. Multiple credit underwriting scorecards for new-to-bank and existing to bank customers are live for credit cards and personal loans, enabling rapid decisioning. Scorecards for personal cars, taxi, small CV and vehicle refinance are under development. On AML monitoring, approximately 60% of alerts are reviewed and resolved through AI-based models with the majority identified as false positives within acceptable risk thresholds. Beyond dashboards and analytical models, a Customer 360 view and customer level profitability model covering both retail and commercial customers has been built to facilitate cross-sell and faster decisioning. Now we are adding AI layer on top of this data platform, which can be used for querying any business KPI dynamically by just writing prompts in plain English. Our AI-driven corrections bot is live, improving engagement and resolution speed. On customer service, inbound calling was launched as the bank's first AI initiative across multiple languages. Outbound AI-led campaigns are underway across businesses with a target to scale up to 25% of total calls over the next 2 quarters. The third area of focus is technology transformation and automation. On the customer-facing side, our 0101 retail app has been revamped with a more intuitive, customizable interface. Our website has also been refreshed this quarter. On the asset side, our deals business runs entirely on sales force LOS. Personal loans are now live on the same platform and credit cards will follow shortly. On liabilities, our branch banking account opening journeys are now fully STP with cross-sell embedded natively within onboarding process. On HR, we've migrated to Davin box from consolidating our HRMS employee help desk and internal communications on a single platform. Across all of these functions, we are migrating to overflow based operating model with over 10 workflows being built across audit, risk, IT, compliance and secretarial functions, reducing e-mail dependency and strengthening audit trail. Lastly, to update on our core architecture. Migration of in care core banking system was completed in April. With this, the integration of Fin care into AU is complete. Now let me give some color on each of our businesses. Our deposit base now stands at INR 1.52 lakh crores, growing by 10% quarter-on-quarter and 23% Y-o-Y. CASA deposits grew by 9% quarter-on-quarter and 20% year-on-year with CASA ratio broadly stable at 28%. Our deposit strategy is anchored on 3 pillars: granularity, stability and cost of ones. On granularity, we continue to grow our branch banking deposit book, which constitutes around 60% of the overall deposits. New CASA account acquisition for FY '26 grew by 62% year-on-year, crossing the milestone of 1 lakh monthly acquisition in December, a run rate which we have since maintained. Strengthening and scaling our deposit franchise remains one of our top focus areas. We are opening 80 to 100 newer branches every year, investing in our brand and expect significant benefits to accrue over time from the anticipated transition to universal banking license. On stability, our focus within wholesale deposits has been on noncallable deposits in order to strengthen our resilience. Total stable deposits, which include CASA, retail and non-callable wholesale term deposits was stable at 79%. On cost of funds, we saw a meaningful improvement. Full year cost of funds declined by 32 basis points year-on-year to 6.75% versus 7.07% in FY '25. Q4 cost of funds was at 6.49% down by 12 basis points during the quarter. Our average LCR for the quarter was stable at 119% versus 118% last quarter. Also, the bank carried 15% additional liquidity in the form of non-LCR investments. Now moving on to our assets franchise. Retail secured assets, which includes wheels, mortgages and gold loan from 66% of our portfolio and grew robustly at 21% year-on-year. Within retail, our wheels book grew by 27% year-on-year to reach approximately INR 46,400 crores, driven by improving affordability across segments. Gold loan business has doubled this year from a low base reached approximately INR 4,000 crores. Our mortgages business comprising micro business loan and affordable housing grew by 11% year-on-year to approximately INR 42,400 crores in a highly competitive market warranting disciplined pricing and underwriting. Increasing growth rate in this business remains a key focus area, and we're working to increase our productivity in newer geographies like Andhra, Karnataka, Telangana, Tamil Nadu and UP. It's important to note that in the last 2 years, we have nearly doubled our retail asset distribution to about 900 to 1,000 branches for each of our retail secured businesses. This expanded distribution is expected to support growth over the next few years. Moving on to Commercial Banking. Commercial Banking forms 22% of our lending business and grew by 29% year-on-year and 12% quarter-on-quarter to reach around INR 31,000 crores with an additional nonfund-based book of approximately INR 11,000 crores. We have carved out renewable energy as a dedicated segment within commercial banking, reflecting opportunity in this space. A strategic priority for commercial banking is self-sufficient on funding. Currently, commercial banking sources approximately 56% of their funding requirements. Combined with transaction banking and CMS, our intent is to progressively run this as a fully self-funded business, a model that strengthens both margin resilience and customer stickiness. Now moving on to unsecured businesses. Our inclusive banking franchise, which primarily includes MFI, saw a strong sequential growth of 8%. Non-overdue collection efficiency in MFI has normalized to 99.7% for the current quarter compared to 99.3% for the previous quarter. 2% of the MFI book is now covered under the CGF MU guarantee scheme. Our [indiscernible] unsecured portfolio comprising credit cards and personal loans grew by 4% quarter-on-quarter. Personal loans portfolio witnessed a resumption in growth this quarter with a healthy 19% sequential increase from a low base. Credit card business broadly stabilized this quarter after nearly 5 quarters of degrowth and should start seeing gradual growth going forward. Moving on to P&L. Our profit after tax for Q4 grew by 25% quarter-on-quarter and 65% year-on-year to INR 832 crores with ROA of 1.8%. For the full year, profit after tax increased by 25% year-on-year to INR 2,641 crores, with ROA of 1.6%. Net interest income increased by 10% quarter-on-quarter on the back of strong growth in loan portfolio, lower cost of funds and seasonally strong margins in the quarter. Full year NII growth was at 14%. Core other income saw 7% quarter-on-quarter growth driven by higher business volumes. Full year the full year core other income growth was at 13%. Operating expenses for Q4 increased by 6% quarter-on-quarter, primarily reflecting higher business volumes. Provisions were down 19% quarter-on-quarter on account of normalization in unsecured businesses and seasonal recovery in secured assets. Full year provisions were also down 10%. The Board of Directors has recommended a dividend of INR 1 per share for FY '26, subject to requisite approvals. To conclude, FY '26 has been a year of disciplined consistent execution true to our long-term vision of building a forever bank. Our priorities remain unchanged, growing our core asset franchises, scaling liabilities franchise and driving structural efficiency through AI and technology. We enter the next phase as a stronger, more diversified and more efficient institution with products, technology, distribution and people all firmly in place. We are inducting AI in our core operating model, which can lead to a complete reimagination of our customer journeys and provide a sustainable operating leverage over the coming years. We believe our franchise is capable of sustainably compounding at 2 to 2.5x of India's nominal GDP growth rate, delivering consistent, predictable and long-term value to our shareholders. I thank our teams for their dedication and all our stakeholders for their continued trust. With that, I will now hand over to Prince for Q&A.

Thank Gaurav. Sagar, we can open the call for Q&A.

[Operator Instructions] Our first question comes from the line of Renish from ICICI.

Congrats on a good set of numbers. Just 2 things. One on this contingency provision creation of INR 21 crores in Q4, so you have mentioned that we have built this towards some specific accounts. Can you share some more details around these accounts like it pertains to the segment and we have seen state commercial banking or maybe what is the great exposure at bank level? And that's my first question. .

Renish, Vivek here. This is -- these are normal -- these are not some high-value specific cases. These are normal business banking, working capital cases. We assess the risk assuming that the risk assessment, whether what amount is covered through our security and other things, the recommendation we provided. So there is nothing specific to it, right?

Okay. So because in PPD basically .

This is the internal risk assessment.

There will be like a lot of accounts, not maybe 2, 3 accounts into this.

Yes. These are like standard account, basically discussion, we destroy the additional proceed.

Got it. Got it. And my second question is on actioning interest rate is selling account and intend of the industry. So are we experiencing some challenges in raising incremental deposits? Or it is that we anticipate some better growth going ahead and to maintain siratose maybe we are hiking just rates to remain competitive.

Yes, Renish, Sanjay this side. So in terms of liability, we are not focusing on 1 data point or 1 way of building it up right. It is a combination of 3, 4 variables like 1 is how much you want to raise the cost of money, how you want to play your CASA, how you want to play or retail versus wholesale the overall CD ratio. But if you see our whole last year performance, our CASA remains stable. It is around 28%, 29%. Our stable money is around 80%. Our cost of money, we were anticipating maybe a drop of only 15 to 20 bps, but we actually drop it by around [indiscernible], right? Our ALM is perfect match. So -- if you ask me, I think we want to pay it like this only this year, too. And it's in every month is working. You can't predict. You can't have a specific 1 role for entire year, right? There's [indiscernible]. And there is a 2-month RB monetary. So we need to play with the environment. And -- but focus will remain on 2 to 3 things. One, we want to build a very stable liability franchise. The focus of bank is entirely on that. We hit the quantity, the quality and I'm very happy that being an SFB. We don't have a right to win so much. But still, the team is doing phenomenally good job. They are building it quality, quantity, overall cost of money. So we are not paying a profit gains, right? We need to build it somehow, somewhere, right? So I would say that our 9-year journey has taught us that liability is that they do their business, right? And we need to play every day.

Got it. Got it. Okay. So there is no, let me say, a structural trend, one should assume based on this. It is thing on a center basis. .

No, Renish. I believe we need to play every day. We need to build it every day. And the more deeper we are going into a banking franchise, more stable and more predictable we are now.

Your next question comes from the line of Kunal Shah from Citi Group. .

Yes. Congratulations for a good set of numbers. So firstly, with respect to AR, we are almost at 1.8% now on exit level. So what would be the focus? Maybe would we still try to drive it up further or sustenance of that will be critical. And what would be the levers available to drive it? No doubt there would be some levers on OpEx, but would it get offset by the other measures, and we will just try to sustain it at 1.8.

So Kunal, obviously, we know that Q4 is always seasonally strong, right? So that 1.8% also reflects that strong seasonality -- our goal would be to maintain this ROE or achieve this ROA on a full year basis for next year. And the levers on that, clearly, as we mentioned earlier as well, we're doing a lot of work on our operating efficiency. So we should see continued improvements year-on-year on the OpEx to asset ratio. So that's one. Second is we are coming out of some of.

Any targeted level.

No. So there's no target. I'm just giving you directionally, what we are working on is difficult to guide you on a line-by-line basis on the ROA tree. And second is on the credit cost front, right, as you know, we are coming out of somewhat of a crisis in MFI. And credit cost has normalized similarly in the credit card business as well as the credit cost is normalizing. So we expect on a full year basis next year, these 2 things in particular to drive our cost credit cost lower than the full year in the current year, right? So I think these are the 2 levers to watch out for next year and we will see how we performed against these two.

Sure. And on margins, you've indicated some breakup with respect to to what you mentioned, 6 bps benefit because of the lower slippages and 7% due to lower day count. So -- but this is an element of IT refund as well as well as some recoveries, which is indicated in that paragraph. So how much -- if you can quantify that because there will be some pressure on yields as well.

So I think on this side, so there was some IT refund. I would not say that it was material to the overall movement, it helped by a tiny bit, but nothing specific to call out there. But in terms of overall outlook on the margin, we've seen sort of strong improvement in our cost of funds continuing for the last 2 quarters. But with this rate increase we have taken, we think cost of funds may have bottomed, right? And some of the seasonal factors, which I spoke about, which were there in this quarter, won't be there for the next quarter or two, right? So I think to that extent, there will be an impact on margin.

Your next question comes from the line of Nitin Agarwal from Motilal Oswal.

Congratulations on a strong performance. So I have 2 questions. One is on the technology like we've spent a good time on technological products that the bank is building, including investments in Gen AI, Agentic AI. How do you see this account into business volumes? And what kind of cost ratios will you now target over the next 2, 3 years as the bad conditions [indiscernible] bank.

Yes. So [indiscernible] second question.

Yes. Secondly, I have more on similar lines because as an SSB range on cost action is already like very tight and it's very narrow across the banks. Most SMBs are like operating our ties to somewhere in 3s. And but as a universal bank, the range is very vast. There are banks below 40 also, so where like which generally have been vesting on many parameters as an SMB. How will you want to position yourself on cost ratio now as you like [indiscernible].

No, Nitin. So let me answer first. So I think why we have given you the more elaborate active description from in our presentation and of course, by our CFO, Gaurav because we are investing a lot in our tech. And you know about that we have around 7, 8 asset classes, we need to build our liability franchise. We want to build it pan-India. And there is a lot of challenge in terms of language, in terms of making everybody understand product, process and making everybody align with one goal, when you want to become a pan-India franchise, something need to be sticking everybody right. And we believe at AU that tech is that medium that can connect all our 60,000 people with all the diversity on the ground, be it product, be it distribution channels, the processes, the policy. So there is a lot of fiction, honestly. You might want to do a lot many things from top but you can't do it on the ground because it's very, very highly, I would say, fixed at every limit. So I think now tech is actually solving it. Much has been solved over the years. But I think now AI is really helping us a lot into that. And we are not saying that AI is only will be helping us in back-end automation or back-end processes or back-end policies, all those things. We want to take it to the front end. And I'm so happy to say you all that we have launched our first AI-led LOS in gold loans, and we actually have given 2, 3 loans on Saturday today also, which is a 5, 10 million fish and less, right? So we believe that AI will allow us to connect with people internally and externally seamless their own comfort language. So in my opinion, if there is even a 10th pass employee. They can also be given job. And with the help of AI tools in their hand, they can be as productive as anybody else on the ground because AI will be doing a lot much as the main, I would say, communicating with the customer and boy will be only doing the necessary things. So we want to invest a lot on those things. And I'm not able to imagine that what kind of cost reduction that AI will do us because it's a very early stage. But if you ask me, being in, I would say, retail physical-oriented franchise, where the cost would always be high, I think AI will help us into 2 sense, our productivity will go up, our channel distribution can go up. Our scale management will be lesser in terms of risk and all those things. So eventually, the cost will get addressed, right? But to get to some numbers, it's difficult, listen, in this call, maybe down the line 1 year, you able to figure out that how much it will help us. But there is a clear-cut advantage to the franchise when we do AI-led acquisition or AI-led assistance in so many cases, then I'm seeing clear current differentiation in times to come. And I don't want to say that AU will be the first AI native bank, but we want to be in that category. And we'll put a lot of focus, money, people to achieve that. So -- but I'm sorry, it's not able to build it around cost. But overall, the focus on cost base is huge, if you ask me. We have gone from 4.3% to 4.1% in this year itself. I believe next year, this current financial year, we should be lower than 4%. So this will be done organically, right? But if you want to disrupt it, I think you have to be tech driven. And that we are on the course, -- and I believe because once you get about the universal and other banks, the scale is very different. So I can't compare myself to the level of 2.5% or 2% kind of the expense on the asset. Rather, I would say that the first benchmark should be that can I do around [indiscernible] and that doing 3 to 5 years, right? So I think it's so difficult to reduce your costs somehow. But I think the tech is able to give us that hope that if you start building it more on tech and allow people to work on tech. This can be achievable faster than what we are projecting in this call also. [indiscernible], add something?

No, I think you've captured it all, right?

Yes. Thank you, Sanjayji, for certain detailed answer and very good quiet provided on it. And one more question that I have is around asset quality. It's very heartening to see that the bank has delivered 1.8% ROE, what is guided for FY '27 right in the fourth quarter itself. And -- but from here now, looking at how the asset quality is shaping up this quarter was particularly very strong. Should we benchmark our estimates around credit cost basis, this quarter number, because if I look back, we used to like a much lower credit cost versus what we have seen in this year. And now we are approaching closer to that number in 4Q now.

Let's say, 2, 3 disclosures. I want to say, having gone very well articulated that this is a seasonal quarter. always quarter 4 remains very strong for in every sense. I won't advise anybody that you should actually build this quarter credit cost as an overall cost for next year. And -- if you ask me, we should build it around 90 bps or maybe in that range, so that it allows franchise to have some kind of risk-taking capability. We want to drive too tight in terms of credit cost estimation. And in the field -- in the market which we operate -- it is not good for the organization, right? Because we need to take risk, in our market, in our business. So I would say build it around 0.90. -- if you say something, it's all of us to share. And I don't think that 1.8% this quarter, ROA should be also -- should be seen as a permanent ROA because there are external challenges, which we all know about it. But I think at AU [indiscernible], we are building it a foundation where we can build a long-term, very solid franchise. Be it people, be it distribution, channel, geography, products, we are investing in every every side of the business. And you've seen how we are building our tech stack also. But I can say that you will be very sustainable in their results because we are working on a lot of inputs. And I think this year is our tenth year of our working and I already said to you maybe a couple of years back that it takes around 10 years to build a very strong foundation. And there's a lot of learnings coming up from last maybe couple of years. So we are taking every learning to really build AU in a sustainable franchise. And I'm very happy that the way the team is taking the ownership team is learning and building it up so beautifully. So I believe that people should not judge us from our this quarter number. I think if you see the whole year number and last 2-year number, I think we remain very strong in our performances.

Your next question comes from the line of Jayant Kharote from Axis Capital.

You for the opportunity, first of all, or regulations on a great set of numbers. SP62614844 First was on the credit cost we also have [indiscernible] loans coming through as we speak. So any impact on steady state credit cost for us given the [indiscernible] book experience in recent years since we are growing that book again, so in regards to the 90 bps guidance, how should that look with the new ECL guideline?

ECL guideline has just came in, right? And we haven't.

It's a the -- It's exactly the same [indiscernible].

And I'm so sorry to give you any guidance around it. You have to take us -- give us some time -- and I've been told that we [indiscernible] is not cover under that ACS program. Is [indiscernible] right.

Yes. I was talking after you transition.

Let us come to that. But I don't think -- of course, Vivek is on the call, Vivek can you comment on that?

Then it's too early to comment on it. Let us understand that you need to understand. Just wonder underlying factor that 90% is our retail secured asset plus I would say secured commercial banking book. So it has a very different connotation to it. Any guideline or any credit cost calculation will eventually work on the lot given default and probability of default, right? So for us, login default in retail asset has always below. I would just want to give that guidance. And MFI is and 100% of my incremental book is covered in [indiscernible]. And -- as we speak, close to 92% book is covered. So -- to that extent, right, any guideline or even the draft guideline had this provision that any government coverage would continue to be benefited out of it.

Second question was in regards to the geographical liability expansion, so to say, next 2 years as you transition to a reversal bank, I do understand on the asset side, you have some focus areas in the south. If you can help us understand what would be your strategy on liability solicit. Do you see some higher contribution from markets like that not count -- so why would their asset side not match up equally? I mean just trying to understand the strategy.

No. So I think if you ask me, the most important strategy, which we work on a daily basis or maybe in execution or any meeting or any reviews around liability franchise. And I think you would have seen that at this level also without having the right to win in those markets, we are able to grow our liability franchise this year to by 23%, right? And if you ask me, we have all the facts there. It's a retail bank, which is around 60% of overall deposit franchise, then we have a government business, any property bank, then we have a commercial-led deposits, then we have a fit, then we have CDs, then it lead deposits. So all our -- if you ask me internally, we know that all are building up very nicely. And the focus remains to build all 4, 5, [indiscernible] for the liability franchise, so that we don't miss anything, right? Retail franchise also, there is subsector line and there is a task. There is a special market. And we are building all product line, all channels -- and nowadays, we are also focusing to cross-sell more as the franchise becoming more mature and immature -- as of now, our liability franchise not talking to the asset franchise largely. So we want that to happen from this year onwards so that when we acquire a liability customers, it's not only 1 transitional, right? It is more relationship, right? And we want to become a pan-India franchise. We have want to open around 800 branches every year. We want to build a brand around it. Once we become universal, then the whole, I would say, the value of franchise will go up. The people will understand us more and more. Our visibility will move more more and more. So I think this year or maybe the next year, we'll have a double-down approach, where you want to build it more faster, more granular, more impactful. And I can assure everybody here that we became bank to build a liability franchise, right? We know that we have a strength in our assets. But our core expertise or core leadership or core acceptance of our visual is around our leadership -- our liability franchise. So you will see us more and more visible in times to come, pan-India. And I'm sure that being so successful on SMB platform, if you are on a better platform, our performance will be far, far better.

I'm safe to assume, sir, since you're building this franchise, we shouldn't be building a quarter on the SAAR TD side, at least in the near term.

Sorry.

On the pricing of deposits since we are in the build-out phase. We should assume that we are comfortable here? Or is there any more opportunities on the TD cuts that you see in the next 2, 3 quarters?

I can't tell you any guidance around it. As I already commented in my earlier answer that liability franchise at our level, at our franchise is a daily business. We have to take the congruence of market or reality on a day-to-day basis. we have ALCO every month, right? And there, we take a decision that how much we can go up, how much we can go down, which sector you want to build, which -- how much we want to build it. And also, it's very operational in my opinion. So -- but if you see the overall result this year, too, our cost of money has gone down by 32 bps. Our CASA is around 29%, 28%. Our retail and stable 1 is around 70%. Our LCR is around 118%. And so we remain so well in all metrics, right? And so idea is to not to have 1 site or 2 sites to remain very holistic in our liability buildup.

The next question comes from the line of Pritesh Bumb from DAM Capital Advisors.

Congrats on a great set of numbers. A few questions, on the asset quality side. So as we have now come out from the line. How are we looking to send them the residual asset quality metrics like PCR, contingency provisions and ACL as we go along.

Pritesh, I think if you look at our Q4 numbers, I could tell you the exact story, we've always been very, very strong on retail site assets. Commercial assets have been rebound. Large part of that was coming from our unsecured ties, which was credit card and MFI. Now both businesses are settling down, right? And the I would say, obviously, there was a seasonality impact. But overall, things look very different, right, from the days where these 2 portfolio had a bit of stress, right? So from -- and PCR is not a defined number. It goes by the provisioning policy. There is no change in the provisioning policy, right? And the DCL guideline as it would come and we need to follow from first April 2027. Obviously, some of it will have a impact on Stage 1, Stage 2, but then you are accelerated provisioning is Stage 3 migrates. So that working is yet to be done, right? I'm saying that the precise what are the finding guideline, the underlying, that's very difficult to comment at this point in time. We need to go through it. We need to put it in our model and we need to perfect our model first, right? And then only we'll able to be able to [indiscernible].

But to add on to Vivek, we have the provision policy, but at every quarter, the risk committee needs and assess the any more provision they require. So this time also, if you really see our PCR, which if you take the credit guarantee book out of it, then we are around 70% right. So I believe you should see us there only. And I can assure everybody on the call that -- our focus always remains to secure any kind of probable loss through this PCR. So that is there. What was the other number.

Yes, PCR. The second question was Sanjay, I just wanted to understand the philosophy for the approval on from here, it's been mostly flat for some time now. Will we focus on asset duration than NIM in the next few years? Or anything on that?

So home loan, we are doing more affordable, right? And there, I would say, again, I think last call also on a call before, I highlighted that, that market has become too competitive. And every new NBFC or HFC is coming and building their book there only. And I don't think that now there is a risk reward left there, right? So we are not going in rationally. We don't want to just do it to build up our growth there because we have not much to unable to really grow. So let's not look for 1 data point because we actually said that we want to grow around 2x or 2.25x or 2.5x to the nominal GDP and which will really deliver, right? So it's really always like some book will be growing some won't be. But overall, we know that we are very diverse diversified ourselves in asset classes. And you want to play a risk/reward game every year. And whenever we feel that is better to grow debt with this work, we want to double down there. And whether we that this is not the right time to push this book. We don't want to do that right. So I think you have to see us that overall, our growth is protected, which we are promising, right? And we'll play around wherever the risk/reward is there.

Your next question comes from the line of Param Subramanian from Investec.

Firstly, I just wanted to understand again the -- how we should think about margins going into next year? So I heard you call out that there is a data benefit this quarter and reversals as well, a benefit of lower reversals. But benefit of lower reversals should stay, right? Because slippages are, say, moderating year-on-year. So basically how to think about that going ahead? .

So I think on this specific thing margins, right? So I'll repeat what I said earlier, right? On cost of funds, I think we've said that this quarter cost of funds may have bottomed out with the rate increases we have taken, right? Then on your point around the seasonality in Q4, so that 6 bps for lower slippages. So that are 2 elements. One is your lower gross slippages. So that's a quarter-on-quarter improvement from Q3 to Q4. And second is your higher NPA reversal within that number. Now to the extent that Q4 is strong seasonally and Q1 is weaker, you won't see this benefit in the next quarter.

So basically, these one-offs will not be there and cost of funds are more or less bottomed out and.

Yes. And your asset yield will reflect whatever the asset mix is, right? That line is a bit difficult to call out. It depends on what is the mix of growth within the asset verticals, right, where your unsecured even with the recovery will probably grow at a pace slower than the rest of the book, right? So on a net-net basis, you may have some asset mix related pressure on yields.

Got it. Got it. Secondly, on fees, right? So generally, we -- in fourth quarter, there is a sharper seasonal update I think it's in the loan assets and in the general banking fees that you call out in your slide. So is there something that is not there this time that was generally there.

No, I think it's -- there's nothing specific to call out there on that one.

Okay. Okay. And lastly, if you could just call out, so your provision coverage is up. I think last call, you had talked about something about how you provide for CFU, which is that you assume the recoveries will come through on the covered portfolio. But this quarter, we are seeing PCR has gone up again. So has anything changed there or we are completely state of this [indiscernible].

So Param, as Vivek mentioned, right, PCR is a function of accounting policy, right? So that -- and where is your NPA coming from, right, which asset class and what is the provisioning policy for that particular asset class determines what your PCR is. So it's an outcome rather than an input, if you will.

Your next question comes from the line of Akshay Jain from Autonomous. .

So I have one question on loan mix in as how should you look at incremental growth in geographies and what proportion of the total comes from second [indiscernible] next 3 to 5 years. So my question was how should we look at growth from the strategic [indiscernible] what proportion of your incremental growth should come from South in, say, 3 to 5 years? And which segments will be driving the growth. And second related question is that in 2 years since the merger. The performance of the non-MFI segments often gets clouded due to the MFI weakness. So how has been the early-stage delinquency trends in the non-MSI segment in the southern geographies now that we are 2 years of growth data here. .

So I would say that it's too operational now. We have become 1 bank. And it's not about Southern market or north market. Certain branches perform, certain doesn't perform. That is why our overall growth estimation, which we have linked to our normal GDP, which makes you 2x or 2.25x or whatever, right, in the range. We want to be on that guidance. In that, some product will work, some won't, some geographies will work, some geographies won't. That's the reality of the situation. But I think the way we have built ourselves overall as a franchise, where we have built, I think, 10, 12 product line in asset classes around 2,500 touch points. We want to grow our distribution. We want to grow our team. We want to grow more and more into the market, right. And there would be also a change in our customer segment once we want to cross-sell more to our existing base. So I think it's not relevant because you want to judge our owner growth rather than some market growth. So I think I would say that from here onwards, we really want to focus on overall growth metrics, overall NIM, overall other income and the credit cost so that we remain solid in terms of overall performance because we start picking on market, 1 project, 1 thing at the call level, then I think the overall, I would say, the fragmented franchise gets lost. But as I already communicated that I'm so happy that the way we are building ourselves, the next big thing in the banking franchise, where we want to become a pan-India franchise with a lot of product offering, in liability and asset with the physical distribution and the tech-led capabilities with 1 data metrics, which overall looks very good. So I think that's our approach. And I think -- and there is no perfect world, honestly. And we have learned that in the last 9 years that there won't be any perfect day. They have to go every day and build ourselves in this whole imperfection. But the way we have understood the market that in the end, it all becomes good. So I would rather say that this year remains 1 of the, again, more of a learning year for us, and let's see how the next year goes into it. But I think after 10 years, I would say that we'll become more predictable in every sense.

Understood, sir. And just on the ROA target of 1.8%. So what I can get from the call is that your margins might stay flat to maybe slightly down because of mix shift. Credit costs, you are asking us to build around 90 basis points versus 60 basis points in the current quarter. So should we assume that a large portion of the 1.8% ROA should come from cost.

Akshay, I think Gaurav said to you that we want to work on our cost. We really want to work on our credit cost. One is your own model where we want to say that project us for '19, but our performance should be better than that. But it's an outcome, right? So difficult to comment in this kind of time last year when we were there, it was so difficult environment. But in the hand, we have performed well. So I believe that once the external environment becomes I would say, more predictable that vulnerability goes out, I think internally, India looks very bright. Internally, India looks very sharp, and we believe that we are building this bank for Indian or India, and we will perform.

Next question comes from the line of Ashlesh Sonje from Kotak Securities. .

First question is on deposits. So there is good progress on CASA deposits, especially on in FY '26. The question is on cost of funds. I understand that there will be intermittent pushes and pulls from the rate cycle and competition. But more through the cycle, do you have an internal target of where this cost of funds should be, let's say, relative to the banks with the lowest cost of funds after you get the nasal bank license that is one, along with that, if you can also share the amount of retail deposits on the balance sheet as on March '26.

So I think the long-term target for the long term, I would say, the way we are pushing internally that our rate should -- our cost of money should be around the repo rate prevalent at that time. So if you ask me, at this time, the repo rates are 5.25% and my cost remain around 6.75%. And if you see the midsized bank, they are around 6.25% and old 3, 4 banks are around 5.25%, right? So ideally, once we become very mature in our universal banking of then then my cost should be around the repo rate at that time. That's a long-term dream and target, but can't comment that when we reach there because you're asking me so that I'm giving you that the view of us internally. Second question your around is retail. Sorry, what was your second question?

Amount of retail term deposits, sir, as on March? .

So Ashish, I think we've covered that in our commentary, right, in terms of how we are looking at the deposits with branch -- so maybe I'll just add a bit more color around this. So we have created 4 sort of focused segments for our deposits business. One of them is branch banking, which is primarily targeting retail deposits. Branch banking contribution to the overall deposit is about 60%, right? So that's one. And then the other segments are wholesale, government and FIG. A second data point we have disclosed is on the stability of our deposit base, where when you look at CASA, retail TD and your noncallable wholesale, that ratio we have disclosed is 79%, which is sort of stable versus the last year, right? So those are the 2 data points we've disclosed in our presentation.

Okay, sir. Sir, and secondly, on the growth outlook, given the uncertainty on the macro, when do you expect to take any action on, let's say, curtailing risk or pulling back credit -- or do you intend to do that?

Yes, it will happen automatically. It will remain because we want to remain very risk various and wherever we'll find the indicators, which is, as of now, is not there. But we believe that -- and we already have said in our opening remarks that wherever we felt that this market, this product, this customer base might get affected because of this challenge. We don't want to onboard them. So -- but it will happen automatically because we have built our credit underwriting model around this.

Ladies and gentlemen, we will take that as a last question for today. I now hand the conference over to Mr. Prince Tiwari for closing comments.

Thank you, Sagar. And thank you, everyone, for joining the call and your questions and for all your support. In case you have any further questions, kindly do reach out to the IR team. Good evening and good night. .

Yes. Thank you so much. Have a good time.

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