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

Ladies and gentlemen, good day, and welcome to AU Small Finance Bank Q1 FY '27 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, Mr. Tiwari.

Thank you, Renu, and good afternoon, everyone, and welcome to AU Small Finance Bank's Earnings Call for the first quarter of the financial year '26-'27. We thank you all for joining the call this afternoon. On today's call from the management side, we have our Founder, MD and CEO, Mr. Sanjay Agarwal; Executive Director and Chief Credit Officer, Mr. Vivek Tripathi; Deputy CEOs, Mr. Uttam Tibrewal; and Mr. Yogesh Jain; CFO, Mr. Gaurav Jain; Chief Digital and AI Officer, Mr. Ankur Tripathi; and the IR team. As we made the announcement today, Mr. Yogesh Jain has been elevated as the Deputy CEO of the bank, and I take this opportunity to congratulate Yogesh on his appointment. We will start today's call with a 15 to 20 minutes opening remarks from Gaurav, highlighting the bank's performance, positioning and outlook. We will follow the opening remarks with a 40 to 45 minutes of Q&A from all the participating analysts and investors. For the benefit of all participants so that we can take everyone's questions, we would request in. For any data keeping questions, you can kindly reach out to the IR team any time post this call. With that, I now request Gaurav to share his opening remarks.

Thank you, Prince. Good afternoon, everyone, and thank you for joining us for our Q1 earnings call. As we step into the 10th financial year of our banking journey, we do so from a position of strength. Our franchise today is more diversified, resilient and scalable, reflecting years of disciplined execution and clear strategic focus. Over this period, we have strengthened our balance sheet, built multiple durable growth engines and continue to invest in technology and talent while maintaining a sharp and consistent focus on risk management and governance. These foundational strengths have enabled us to navigate evolving operating conditions with confidence and deliver strong high-quality performance. Let me now take you through the key highlights of the quarter. Q1 was marked by heightened geopolitical uncertainty arising from the ongoing West Asia crisis. The Indian economy and the banking sector, however, continued to demonstrate resilience with healthy credit growth across segments. Liquidity conditions remain relatively tight with heightened competition for deposits and elevated interest rates. While we remain watchful of evolving external risks, these developments have not had any material impact on our business momentum and our operating performance continues to be strong across key metrics. Deposits growth remained robust at 24% year-on-year, significantly ahead of the estimated private sector banking deposit growth of 14% Loan portfolio grew by 23% year-on-year versus private sector banking growth of 17%, with secured assets growing by 25% year-on-year. Growth in unsecured businesses improved with 11% year-on-year growth and 5% quarter-on-quarter growth led by microfinance and personal loans. Disbursement for the quarter was up 42% year-on-year, driven by continued strength in our core retail secured and commercial banking businesses. Asset quality remained robust with slippages declining by 22% year-on-year to INR 798 crores, driven by improvement in the unsecured portfolio. Slippages in secured assets portfolio remained stable. Profit for the quarter grew by 37% year-on-year to INR 796 crores, driven by core PPOP growth of 41%. Net interest margin increased by 47 basis points year-on-year to 5.9%. Core fee income grew by 33% year-on-year, driven by higher business volumes. Cost-to-assets ratio, excluding CGFMU premium, was 4% up marginally from 3.9% last year, driven by strong disbursement growth and investments made in distribution, manpower and technology over the last 12 months. Operating leverage continues to play out on an underlying basis, and we expect cost-to-assets ratio to improve on a full year basis. Credit cost, including CGFMU fee declined by 54 basis points year-on-year to 0.8% compared with 1.4% a year ago. ROA for the quarter was 1.7% versus 1.5% in Q1 last year, and ROE was 15.6% versus 13.3% in Q1 last year. PAT for the quarter included an additional onetime provision of INR 23 crores from further strengthening of NPA provisioning norms in selected products. We continue to further strengthen our leadership with elevation of Mr. Yogesh Jain as Deputy CEO and appointment of Chief Risk Officer Designate and Head of Technology. These additions add to our domain expertise and reinforce our focus on enhancing risk management, strengthening technology capabilities and building a high-quality future-ready institution. I will now talk about our tech initiatives. We have aligned our technology agenda around 3 priorities: run, build and transform with focus on protecting and scaling the core franchise, accelerating digital adoption and building a future-ready institution powered by data and AI. During the quarter, we made meaningful progress in embedding AI and automation into core business processes. We successfully rolled out our AI-enabled gold loan origination platform in a controlled environment. A mobile native version is now live, and we will start extending this to branches in a calibrated manner. On the same Agentic AI platform, build-out of loan origination journey for mortgages will also be undertaken. AI-led transformation initiatives are underway across vehicle finance, personal loans, credit cards on the existing platforms, whereas commercial banking journey is being built on a new platform with a focus to improve turnaround times, customer experience and productivity. We also launched a unified lead management platform for facilitating lead aggregation, filtering and dissemination of leads. This platform is integrated seamlessly with AU's native lead management system and is expected to facilitate greater customer acquisition, increased cross-sell and upsell by improving lead conversion and channel efficiency. Our digital platforms continue to scale well. With more than 90% of the bank's transactions and service requests now being processed through AU 0101, we also rolled out an enhanced UPI payment interface on this platform during the quarter. On the customer service side, we are leveraging AI voice bots to deliver faster and more consistent experience across 11 languages while enhancing workforce productivity. We continue to deepen use of data and analytics to drive growth and efficiency. Key initiatives include deployment of analytics-led scorecards across secured and unsecured portfolios, scaling of propensity-based models that has increased pre-approved PL offers by more than 3x and leveraging AI-driven risk assessment tools that now automatically resolve 70% of AML alerts. We are also live with our Customer 360 initiative, building a single enterprise view of customers to enable more personalized engagement and better business outcomes. Overall, our technology investments remain focused on delivering measurable business outcomes today while creating a scalable foundation for sustainable growth and long-term differentiation. Now let me give some color on each of our businesses. First, on deposits. Our deposit base now stands at INR 1.58 lakh crores, growing 24% year-on-year and 3.3% sequentially. CASA deposits grew 22% year-on-year and 4.7% quarter-on-quarter. CASA ratio improved marginally on a quarter-on-quarter basis to 29%. As mentioned last quarter, we have organized our liability franchise into 4 verticals: branch banking, which accounts for 60% of deposits; government and interbank deposit team, which account for 21%; commercial banking and wholesale deposits, which contributes 7% and Financial Institutions Group, which accounts for 8% of total deposits. Branch banking focus is on granular -- on garnering granular retail deposits, while the other 3 verticals are driving solution-led deposit growth, leveraging our capabilities in CMS, transaction banking and FX. During the quarter, we added 16 new deposit branches and remain on track to add another 100-plus branches this year. New CASA account acquisition was strong with 80% year-on-year growth in premium accounts. We further expanded our remittance offerings, keeping in mind the convenience of our customers with international banking needs. Retail customers can now send and receive money internationally at transparent exchange rates with 0 ForEx margin and 0 bank charges, a first of its kind offering amongst private sector banks in India. Within bulk deposits, our focus remains on noncallable deposits to enhance stability of our deposit book. Total stable deposits, which include CASA, retail TDs and noncallable bulk TD remained strong at 79% of total deposits. Overall, we remain highly focused on further strengthening our liability franchise with ongoing investments in products, distribution and branding. Now moving on to our assets franchise. Q1 saw continued strong growth in our asset franchise in a seasonally softer quarter. We are seeing a steady increase in business contribution from the newer geographies where we've made significant investments in building capabilities over the last 1 to 2 years. Retail secured assets, which includes wheels, mortgages and gold loan, forms 67% of our portfolio and grew 23% year-on-year and 4% quarter-on-quarter. Within retail, our wheels book grew by 28% year-on-year and 5% quarter-on-quarter to reach INR 48,600 crores, driven by strong demand in the new vehicle segment and increasing traction across newer geographies. Gold loan business grew by 130% year-on-year and 15% quarter-on-quarter to reach INR 4,500 crores. We initiated gold loan product across 400-plus existing branches during the quarter, taking total gold loan distributions to over 1,300 branches. Our mortgage business comprising micro business loans and affordable housing grew by 12% year-on-year and 2% quarter-on-quarter. Disbursement in mortgages picked up with 28% growth year-on-year in this quarter. Moving on to Commercial Banking. Commercial Banking business grew 34% year-on-year and 6% quarter-on-quarter to reach INR 32,800 crores with broad-based growth across our verticals. Our focus continues to be on making commercial banking business progressively more self-funded through current accounts and increased penetration of transaction banking, CMS, trade and other relationship-led offerings. Transaction banking and ForEx business has started to gain momentum with income growing 46% Y-o-Y and 8% quarter-on-quarter. Now moving on to unsecured businesses. Our inclusive banking franchise, which primarily includes MFI, grew by 15% year-on-year and 5% quarter-on-quarter. Collection efficiency continued to hold up well at 99.5% and 96% of the book is now covered under the CGFMU guarantee scheme, which provides an additional layer of comfort. Our digital unsecured portfolio grew by 3% Y-o-Y and 7% quarter-on-quarter. This was led by personal loan business, which grew 24% year-on-year and 19% quarter-on-quarter from a low base, driven by increased focus on cross-sell. The credit card business also saw marginal growth with new card issuances crossing 1 lakh mark in Q1. Now moving on to P&L. As mentioned earlier, our profit after tax for Q1 grew by 37% year-on-year to INR 796 crores. Net interest income increased by 32% year-on-year on the back of strong growth in loan portfolio and 47 bps Y-o-Y improvement in margin. Sequentially, margins declined by 7 basis points to 5.9% due to reversal of certain seasonal benefits, which aided margins in last quarter. Cost of funds remained broadly stable at 6.48%. Increased cost on savings accounts and wholesale funding was offset by residual repricing of retail term deposits. Core other income grew 33% Y-o-Y, driven by strong business volumes and higher credit card issuance. ForEx and trade-related income continued to scale up from a low base. Operating expenses for Q1 increased by 26% year-on-year, driven by strong disbursement growth and investments made in distribution manpower and technology over the last 12 months. On a quarter-on-quarter basis, operating expenses declined by 1%. Our focus continues to be on driving tech-led operating efficiencies and overall overhead control. Provisions decreased by 13% year-on-year on account of normalization in unsecured businesses. On a quarter-on-quarter basis, provisions increased by 38% due to seasonal trends. Provisions for the quarter included an additional onetime impact of INR 23 crores from further tightening of provisioning norms in selected products. To conclude, despite the volatile external environment, momentum across our deposit and loan businesses remain strong, underpinned by the strength of our diversified franchise, distribution and underwriting discipline. As we progress on our growth journey, our priorities remain clear: accelerating deposit franchise expansion, strengthening core lending businesses, improving operating efficiency by leveraging technology and AI and maintaining disciplined risk management. While we remain watchful of the macro environment, the investments we have made over the last few years in our people, processes, product, technology and distribution provide a strong foundation to sustainably compound 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'll now hand over to Prince for Q&A.

Thank you, Gaurav. Operator, we can open for Q&A.

[Operator Instructions] The first question comes from the line of Jayant Kharote with Axis Capital.

Congrats on a great set of numbers. So the first question is on the slippages. If you could give some color on this quarter slippages. I see slight inch up in commercial banking NPAs Q-o-Q. So if you can call out what is the nature of the product over here? That is the first question. I'll follow up with the second one.

Jayant, this is Vivek. See, Q1 is always -- Q4 is always a very, very seasonally strong quarter for us. So I think right comparison would not be quarter-on-quarter. Right comparison would be quarter -- year-on-year, the Q1 last year versus Q1 this year in all asset classes, be it secured retail asset, be it our credit card PL, be it microfinance, obviously, we had a great recovery in both the unsecured products. But even on the -- if you compare year-on-year basis, commercial banking slippages are lesser. So at a bank level, there is an almost improvement of 150 bps.

Understood. Sir, if you could tell what was the product that seasonally Q-o-Q moved in commercial banking?

So it's typically SME book, right, which is a business banking book, which will have some bit of uptick in the Q1 and then it slows down, right?

Understood Sir, the second question is on the ECL framework. I believe our time line on the application of universal license is around Feb, March, which means we will enter the next year on the new ECL framework or we'll have to transition there. We are seeing an increase of around 12 to 20 basis points on steady-state credit cost for banks. Given we've had some books or some products having some cycles in recent years, can we see a higher impact on our steady-state credit cost under the new framework?

For us, it will be difficult to quantify at this moment. We are refining our LGD and PD models. We are working with external agencies. And given that the kind of provision we carry in a Stage 3 assets, right, it gives us enough comfort. However, the final outcome will depend on what kind of policies we adopt for accelerated provisioning or for write-off policies because that's the moment we implement ECL, all those parameter changes. So it will be a Board-approved policy. But given -- as we speak, at this moment, there is a greater comfort from Stage 3, which should cover up Stage 1, Stage 2 incremental provisioning, right?

So that will be onetime no?

Even on an ongoing basis, Jayant, Prince here, our provisioning policy right now is pretty much tighter than what the regulatory requirement is. And to that extent, we feel comfortable given the current policy, right? In case there is a change in the policy, then obviously, we'll come back and update you.

Jayant, our retail secured asset and even on the commercial side, it's largely secured. Our LGDs are pretty low compared to what the industry would look like. So we are very, very comfortable in that.

Definitely, sir, secured book will definitely be helpful over here. Sir, in this INR 23 crores is regarding any product tightening or general buffering up of provisioning?

It was just a more of alignment of all unsecured products, be it credit card, MFI and PL on the same lines. There was a differentiation. So we just aligned them all. That's it in terms of the provisioning policy.

Congrats on a great quarter, especially on the margins.

Thank you.

Next question comes from the line of Renish Patel with ICICI Securities.

Congrats on a good set of numbers. Sir, just 2 things. So one, on this -- I'm referring to Slide #30. So in digital unsecured book, it appears that our risk-adjusted yields are actually lower than retail secured assets. So just wanted to understand how is the pricing policy works for specifically this product? And if you also can share profitability in this product would be great. I mean, of course, I know you don't share product-wise profitability, but maybe directionally, if you can just give us some trends in this specific book would be helpful, sir.

So both these businesses, as you know, credit cards as well as PL is relatively newer businesses for us and still just coming up the curve, right? So I don't think it's the right metric right now to look at what's the risk-adjusted yield there. because credit card went through a cycle, we know that. And we have kind of -- we have just started to regrow the PL business as well as the credit card business. So I believe the -- right now, it's more probably not a true reflection, if I would say that. So let these businesses get built out because they are currently loss-making, right? So as this -- I mean, credit card is -- PL is obviously breakeven. But give us some time for these businesses to evolve before we can actually talk about either the product level ROA or the profitability in terms of risk-adjusted yields.

Yes. These are strong cross-sell businesses, right? For our entire liability franchise, these are...

Yes. So just to add, right? So PL, as Prince said, PL is obviously profitable with good yields and specifically on the credit card, because of the tightening of underwriting norms that we've taken sort of, say, 18 months back, the percentage of revolve book has come down, right? So that's why the yield on credit card book is a bit subdued. And that's why you see the weighted average yields at those levels, right?

[indiscernible].

Yes, yes, yes.

Because I was just looking at the broader yields, right? So in retail secured assets, we are having 14%. In digital and secured also, we are having 14%. But the gross NPA in this book, obviously, unsecured in nature, having higher gross NPA and hence, I'm assuming there will be higher LDs as well. So I was just thinking on risk-adjusted basis, the yields are definitely lower than the secured book. So I was just wondering on that part.

Yes. Renish, these businesses, credit card, as you know, is a work in progress for us. We have taken a lot of actions over the last 12, 18 months, right? So give us some time, and you will see the underlying profit pools emerging in our unsecured businesses over time.

Got it. Got it. And my next question is on the margin trajectory. So obviously, this quarter, it has been moderated a bit and in line with what we have guided in Q4 as well. But how should one think about next 2 to 3 quarters' trajectory on the NIM side?

So Renish, as we've mentioned in the previous quarters as well, it's always difficult to predict margins because of multiple moving parts. So I don't want to give you any sort of directional guidance on that. But what we know is cost of funds has effectively bottomed out as we mentioned last quarter as well. And we've taken some increase in both savings account and deposit rates, right? So you will see that line being stable to maybe increasing a little bit depending on how the rate environment evolves from here. And on the asset side, our yield will continue to reflect the mix of assets as we go forward.

Next question comes from the line of Nitin Aggarwal with Motilal Oswal Financial Services Limited.

Congrats on a good set of numbers. I have 2 questions. One is on the asset quality, like touching upon the unsecured business growth wherein we have started to see some recovery now, MFI growth of almost 5% Q-on-Q. How are we looking at this to sustain over the year? It's a strong start, it looks like. And also if you can comment around the vehicle business also mainly around the CV as to how is the credit environment shaping up on that side?

Nitin, this is Vivek here. So I think microfinance business had a lot of subdued quarter-on-quarter industry-wide deacceleration, I would say, in the overall degrowth in the book. But I think post MFin guardrails industry has actually reached to a stage where a lot of discipline has come in the field, and that's the reason you would see more and more player falling in line. And the overall industry, there is a positive traction. In fact, MFin is also projecting about 17%, 18% kind of a growth. So we are just following that, and that's visible also on the field. And as far as on the asset quality is concerned, it numbers are holding up. In fact, the Q1 collection efficiency, typically, which has a seasonal dip, could sustain to the tune of 99.5%. So that -- the difference is about 20 basis points from the Q4. But if you look at last year Q1 was very, very different, right? And on top of it, 96% book is secured, which gives us a lot of comfort that the -- even if there is some event and there is some slippages happen, you have few coverage in this book. On the vehicle side, we have now strong distribution in South. We have a strong distribution in now in UP and newer states in East. So that is now giving us the additional volume, and we are very, very confident that the current customer segment we operate, we understand there is a good trajectory. And for us, the -- on the asset quality side, more or less, it remains what it is typically in Q1. There is no abnormality. There's no indication to suggest that in any of the part of the book, there is a heightened stress or any slippages, which is abnormal to a normal sequential, I would say, quarter, which typically happens over the period, right? So nothing unusual in the book. It gives us a lot of confidence to accelerate the growth on deal side.

Got it. And so on the CGC part, when you said 96% is under that. So do we plan to lodge any claim or is something under process for all the losses that we have taken last year?

So it's an annual process. It's a pool Nitin, it's a pool-based coverage. So 2025 book was covered in 2026 and will also be covered in this year. the 2026 coverage, whatever we have taken for last year, we can claim. So it's a 6-month seasoning post NPA and post that, you can lodge the comp. So that's a cycle, right? So typically, by end of Q2, whatever crystallized NPAs you will have for FY '26 full, you will lodge the claims. That would typically be realized by mid of December, by end of December, right?

And any color on how much this number can be?

It will be part of the overall NPA only Nitin.

So Nitin, just to share some broad context. So as Vivek said, 96-odd percentage is covered, right? And then similar percentage of SMA is covered, but some of our NPAs are coming from more vintage pool pre sort of CGFMU coverage, right? So coverage of CGFMU on the GNPA portfolio will be slightly lower.

Okay. Okay. Got it. And one small question around the CD ratio now. I see that we have been giving 2 CD ratios for a long time ever since this metric came in focus. So which CD ratio, I mean, will you look at to optimize the balance sheet? Because if I adjust for refinance as reported, then there is a lot of liquidity that is still there, but the reported number may look high. So which internally you look at to see that the balance sheet is fairly optimized?

Nitin, I think we are very comfortable with our number because CD ratio refinance is below 80% and it's 88%. So we don't look this number to optimize anything, right? It is just -- we look at this number for our sustenance, right? How much we should raise deposits and how much we can do a loan. So we are very comfortable in this kind of number from last maybe 3 to 4 years actually. So not much to read around it in my opinion.

[Operator Instructions] Next question comes from the line of Akshay Jain with Autonomous.