ESAF Small Finance Bank (ESAFSFB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to ESAF 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 Dr. K. Paul Thomas, Managing Director and Chief Executive Officer. Thank you, and over to you, sir.

Thank you, and good afternoon. We welcome you to the Q1 FY '27 Earnings Call of ESAF Small Finance Bank. Joining me today are my colleagues, Mr. George K. John, Executive Director; and Gireesh C.P., EVP and CFO. Crossing INR 50,000 crore business is more than a numerical milestone. It reflects the successful execution of our transformation strategy over the last 2 years. We have consciously diversified our portfolio, strengthened underwriting, improved collections, enhanced our liability franchise and invested significantly in technology. The improvements we are seeing today are therefore structural rather than cyclical. I would like to thank all our stakeholders, including our employees and most importantly, our customers for the trust they have placed on us. Our MARG strategy has clearly been the key highlight of our transformation journey. And all the constituent segments of MARG, especially gold, agri, vehicle, and mortgage have all shown strong growth both on Y-o-Y and quarter-to-quarter basis. This portfolio also has lower delinquencies, which has helped us in improving our asset quality. Our objective is no longer to pursue growth through a single product or customer segment. Instead, we are building a well-diversified retail franchise where secured lending, emerging households, microfinance deposits and digital capabilities complement each other. This creates a more resilient balance sheet across economic cycles. Another important area for us now where we are looking at renewed focus is the emerging household loans category. And we believe it will be the next catalyst for growth. Emerging household represents customers graduating from financial inclusion towards mainstream retail banking. These customers already have established a repayment behaviors and growing income profiles. By serving them through a broader suite of banking products, we deepen relationships while improving portfolio quality and lifetime customer value. The idea is to use a calibrated approach and build on our strong presence across rural and semi-urban geographies to provide a wider range of banking products and financial solutions to customers who have progressed beyond traditional microfinance. These customers would mostly be individuals, self-help groups, small entrepreneurs and other emerging business customers with a maximum ticket size of INR 10 lakhs. Over time, we expect emerging households to become one of the largest customer franchises within the bank. All our strategies have been built with a clear focus on creating a stable, diversified, and resilient asset base that is supported by disciplined execution. Investments in technology, prudent risk management, strong governance and operational efficiency. This will help us serve a wider customer base and further improve our financial and business parameters in the coming quarters as well. On the macro front, the Indian economy and the banking sector continue to show resilience despite the ongoing West Asian crisis, with healthy credit growth segments and steady deposit mobilization. While these events have not had any material impact on our business or operating performance, we remain cautious and watchful for future developments. So overall, Q1 FY '27 has been a good quarter for us and gives us confidence that we are moving in the right direction for the next phase of growth. The MFI sector appears to be gaining momentum. We have enhanced our secured portfolio and financial parameters have started improving again. Last 2 years, because of the asset quality and industry challenges, we could not fully leverage on the network that we have built. But going forward, we are seeing a great opportunity to efficiently build on the strength of this network, present mostly in the rural and semi-urban areas to expand our deposit franchise and strengthen our lending business, ultimately ensuring sustainable profitability. I now invite our Executive Director, Mr. George K. John, to take you through the next segment.

Thank you, Paul sir, and good afternoon, everyone. We continued our focus on sustainable growth and financial discipline during the quarter. As a result, there was marked improvement across key parameters sequentially, including improved profitability, asset quality metrics, moderation in slippages, better operating efficiencies and increasing return ratios. As of 30 June 2026, our total business stood at INR 50,140 crores, registering a healthy year-on-year growth of 23% compared to INR 40,923 crores last year. During the same period, gross advance grew by 27% while deposits increased by 19%, reflecting balanced growth across both sides of the balance sheet. If we add IBPC transaction done during the quarter, our total business stands at INR 51,140 crores. On the liability side, retail deposits remained strong at 91% of total deposits, and CASA stood at 23.4%. Our liquidity coverage ratio stood at 143.31% as of 30 June 2026, indicating a comfortable liquidity position. Our liability strategy remains centered on granular retail deposits. We continue to deepen customer relationships while improving the quality and stability of our funding base. This remains a strategic priority for us. On the advances side, secured loan book grew by 35% Y-o-Y and now stands at 62% of total gross advance, whereas the unsecured loan book grew by 16% Y-o-Y. The improvement in asset quality is driven by better portfolio mix, stronger underwriting standards, disciplined collections and normalization within the microfinance sector. We, therefore, believe the current trend is supported by sustained improvements rather than temporary recoveries. Secured growth is driven largely by portfolio and we saw strong growth in all its major constituents driven by effective execution and tailored offerings across key geographies. Agri loans and mortgage were the standout performance. At INR 10,909 (sic) [ 14,465 ] crores in Q1 FY '27, the MARG portfolio has grown by 35% Y-o-Y and 62% of total portfolio. MARG is not simply a portfolio classification. It represents our strategy to increase secured retail lending through products where we foster strong distribution capabilities, local market knowledge and attractive risk-adjusted [ portfolio ] returns. This is portfolio expected to remain one of the primary growth engine over the medium term. We have also renewed our focus on the emerging household segment. Emerging household loans consist of disbursements to customers who are typically individuals and small entrepreneurs who have progressed beyond traditional microfinance. It caters to customers transition towards greater financial stability and retail banking relationships and who are ready for a broader range of banking solutions. Their annual income is in the range of INR 3 lakhs to INR 15 lakhs. Our ticket size in this segment will always be less than INR 10,000 lakhs -- sorry, INR 10 lakhs. These segments have been broadly classified into individuals, self-help group, entrepreneurs and farmers group. In this portfolio, unsecured lending is restricted to individual loans only. All other lending within the segment is secured. This segment has grown 18% Y-o-Y and 14% quarter-on-quarter, while contributing 22% of total gross advances. Microfinance loans portfolio comprising of group loan has degrown -- this decline in the traditional group lending portfolio is entirely consistent with our strategic direction. Rather than existing customers, we are migrating individual borrowers in individual and securing lending [portfolios] under the emerging household framework. This represents customer progression rather than customer attrition. This portfolio transition is ultimately aiming at improving portfolio quality, reducing volatility, and supporting sustainable long-term growth. We are leveraging the improving macro environment by adopting a calibrated strategy for growing our MFI portfolio. We have reduced our corporate loans exposure, and we expect them to remain in the current range as we continue to focus our efforts on increasing the MARG and EH portfolio. During the quarter, we added 17 new banking outlets and now our distribution footprint stands at a total of 821 banking outlets, 721 ATMs, 64 customer service centers, and 31 institutional business correspondents across 24 states and 2 union territories, enabling deep customer reach and connect. We added 1.8 lakh new customers during Q1 to reach a total of 1.04 crores customers as on 30 June 2026. We have already mentioned over the last couple of calls about ESAF 2.0 partners, which is our key strategic digital and IT transformation program. It is aimed at strengthening the bank's technology backbone, and we have been progressing quite well and [indiscernible] our adoption within our ecosystem. We estimate it to be fully implemented by the end of this calendar year. It will bring in the much needed agility in the core business process that will enable adoption to the emerging market needs, improves turnaround times, and an ultimately enrich customer experience and service. ESAF 2.0 is expected to significantly improve scalability, automation, and operational efficiency. It will enable faster product launches, improved straight-through processing, better customer experiences, and stronger risk control. We believe this technology platform will support the bank's growth over the coming decade. We commit to further strengthen our leadership with the appointment of [ Mr. Pindrala ], our National Branch Banking; and Mr. Narasimha Murthy, our Chief Risk Officer. These additions add to our domain expertise and help us further in building a high-quality future-ready institution. As we move into the rest of FY '27, our priorities remain clear and consistent. We will continue to execute our strategy with discipline by further strengthening our secured lending franchisee through MARG scaling the emerging household segments as the natural progression of our financial inclusion journey and maintaining a balanced approach to growth and risk. At the same time, our investment under ESAF 2.0 will enhance agility, productivity, and customer experience, creating a stronger technology foundation for the future. The improvements in our business performance, asset quality, and profitability reflects structural changes we have made over the last 2 years, and we remain confident that disciplined execution, prudent risk management, and customer-centric innovation will enable us to deliver sustainable and profitable growth while creating long-term values for all our stakeholders. I will now invite our EVP and CFO, Mr. Gireesh C.P., to take you through the financial performance.

Thank you, sir. Good afternoon, everyone. I thank all the participants for taking time for joining us on this earnings call. Let me give you an overview of our financial performance highlights for Q1 FY '27. As of Q1 FY '27, total deposits stood at INR 26,924 crores, growing 19% as compared to INR 22,698 crores last year with a healthy CD ratio of 82.3%. Retail deposit increased to INR 24,487 crores, registering a growth of 13% Y-o-Y, which now constitute 91% of the total deposits. Our retail deposits reflect a stable and granular deposit base, which we will continue to build further. Additionally, we are also seeing good traction in our nonresident deposit base, witnessing a steady sequential growth for last 4 quarters. CASA deposits grew at a slower pace than time deposits to INR 6,297 crores in Q1 FY '27, registering a 12% Y-o-Y growth with the CASA ratio at 23.4%. Gross advances increased to INR 23,215 crores from INR 18,224 crores a year ago, registering a growth of 27% Y-o-Y. Our strategic priority of diversifying the loan book remains on track. The secured portfolio stood at INR 14,465 crores with a growth of 35% Y-o-Y, whereas the unsecured portfolio stood at INR 8,751 crores with a growth of 16% Y-o-Y, aligned with our strategy. Net interest income improved to INR 584 crores in Q1 FY '27 from INR 378 crores in Q1 FY '26, driven by a healthy loan book growth with a strategic product mix coupled with low slippage numbers. On the cost side also, we could contain the funding cost by calibrated funding and pricing strategy. Quarterly net interest margin is presently at 7.9% range, which may moderately come down because of the subdued deposit growth witnessed by the banking system in the recent past. However, we expect that NIM could be kept at a level above 7.5%. Lower cost of funds and lower slippages primarily for unsecured will continue to maintain improved margins. The cost of operation is also normal and under control, and the bank will leverage the increased network for its planned business growth. Pre-provisioning operating profit for the quarter of INR 349 crores is up by 179% Y-o-Y. The improvement in PPOP was consistent and promising for the last couple of quarters and is expected to remain stable. This was achieved through robust business growth, appropriate pricing of products and consistent growth in fee-based income. Other income for the quarter grew by 27% Y-o-Y. Operating expenses in Q1 FY '27 grew by only 1% Q-on-Q and 8% Y-o-Y and cost-income ratio stood at 58% as compared to 78% in Q1 last year. We will continue to focus on further improving operating efficiency, enhance productivity, and optimize overhead costs for the remaining year as well. Normalization in the MFI sector and the changes in portfolio mix has led to improvement in asset quality and lower slippages. As compared to Q1 FY '26, gross NPA for Q1 FY '27 declined to 5.4% from 7.5% and net NPA declined to 0.8% from 3.8% while slippages reduced sharply to INR 75 crores from INR 468 crores on a Y-o-Y basis. We have set aside an additional provision of INR 65 crores during the quarter over and above the RBI norms and Board approved policy. And accordingly, our provision coverage ratio improved to 86%, but for which it would have been 81%. Credit cost on annualized basis at 4.4% flattish, but due to a lower net NPA stock and slippages well under control, we estimate the same will come to around 2% by the year-end. Our gross slippage ratio for Q1 FY '27 on an annualized basis stands reduced to 1.4%. Q1 FY '27 profit after tax increased sequentially to INR 80 crores from a PAT of INR 24 crores in the previous quarter. ROA and ROE are reaching normalized levels and stood at 1% and 17.4%, respectively, on an annualized basis. As business volumes continues to scale up by exploiting the operating leverage from our distribution network and improved technological capabilities, further improvement in the return ratios are expected in future. This marked turnaround has been achieved with our continued focus on strategic transformation through stable business growth, diversified asset book, disciplined underwriting, improved operating efficiency, and supported by stable microfinance sector. As we enter the next phase of our journey, our priorities remain unchanged: profitable growth, disciplined risk management, operational excellence, and customer-centric innovation. We believe the investments made over the past 2 years have created a strong foundation for sustainable value creation for all stakeholders. Thank you very much. And now the floor is open for question-and-answer session.

[Operator Instructions] Your first question comes from the line of Deepak Poddar with Sapphire Capital.

Am I audible, sir?

Yes, yes.

Many congratulations for a good set of numbers. Sir, just wanted to understand, first up, now on this credit cost outlook that you have given 2% credit cost by FY '27 end, right? And currently, including the management overlay, it was close to 4.2%. But if you exclude the INR 65 crores, it would be around 3%, right? So you expect this additional provisioning, I mean, because given the PCR is already at 85%, 86% -- so coming quarters, you wouldn't need to provide this additional provisioning?

Yes. Our stock of net NPA is only INR 184 crores as of now. And last quarter, the slippage number was very major -- at the gross level, it is INR 74 crores. And at net level, it is only INR 40 crores. So that way going forward also, we don't see any drastic increase in the NPA number. So this gives us the confidence that the credit cost will come down in the coming quarter.

Okay. 2% by FY '27. And what does it mean for ROA? I mean, for this FY '27, what sort of ROA, then we are looking at given credit cost will decline to 2% by FY '27?

ROA, we expect that it will be 2% by year-end.

Okay. So 2% of an ROA by FY '27 end, right?

Yes.

Okay. Okay. And now coming to your other income. I noticed that this first quarter, you had INR 69 crores of PSLC income. So just wanted to understand, I mean, how is it distributed between the quarters? I mean do you expect this trajectory to continue in coming quarters as well or PSLC income will decline?

It will continue because we are in the growing space in the priority sector. But normally, the rate of the PSLC in the coming quarters will be on the lower side. So this kind of magnitude may not be there in the coming quarters. But definitely, there will be some contribution from that side.

Okay. So for the entire year, what sort of PSLC income we are expecting to generate?

Maybe around INR 20 crores to INR 25 crores in this quarter alone.

INR 20 crores to INR 25 crores in this quarter.

Yes.

Okay. And just one last thing on FY '28 now. I mean, earlier, we were alluding to FY '28 being a 2% ROA for the entire year. Now we are targeting to achieve by fourth quarter itself this year. So for FY '28, then how should one look at FY '28 in terms of your ROA?

It is too early to exactly give a number because the liability side, how it is shaking out, what are the challenges going forward, what will be the government -- what will be the RBI policy on the rate front? All those things will be dependent on that. But definitely, as stands today, it will be more than that we are seeing in FY '27 as per the revised estimate.

Higher than your exit FY -- fourth quarter ROA? I mean...

That is right.

No, sir, I didn't get you. So what did you say?

No, we are now -- this is Paul Thomas, the MD. So we are on a growth phase. So definitely -- and we are -- if some totally unprecedented and unexpected things have not happened, we will -- we are on the growing phase. So...

Okay. And I was just trying to...

I'm not done. We are not -- we are not just -- we are not giving you a specific number, but the direction is very clear about ...

The next question comes from the line of Amit Mehendale with RoboCapital.

My first question is on the effective tax rate for FY '27 and '28. I mean considering that we have had losses in the past, what do you expect the effective tax rate to be?

Effective tax rate will always be around 25.5%.

So we will have some DTA to offset, right?

Yes, DTA will be there, yes.

Do you still expect 25% of tax rate?

Yes, because the DTA impact will come only on the cash outflow on the taxes, et cetera. But the effective tax rate is after taking because we have recognized the tax gain on loss during the last year itself.

Right. And sir, in terms of capital, do you plan to raise any Tier 1 capital in FY '27?

We have our CRAR is very comfortable now. We have 23 -- close to 24% CRAR is there. But depending on -- as per our long-term strategy also, we also have to bring down the promoter holding to 26% by '31 -- 2031. So as the market conditions improves, we are exploring.