SBFC Finance Limited (SBFC) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the SBFC Finance Limited Q1 FY 2027 earnings conference call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. [ Dinesh ] from ICICI Securities. Thank you, and over to you, sir.

Yes. Thank you, Swapnali. Hi, good evening, everyone; and welcome to SBFC Finance Q1 FY '27 earnings call. On behalf of ICICI Securities, I would like to thank SBFC management team for giving us the opportunity to host this call. Today we have with us the entire top management team of SBFC represented by Mr. Aseem Dhru, Executive Vice Chairman; Mr. Mahesh Dayani, MD and CEO; Mr. Sanket Agrawal, Chief Financial Officer; and Mr. Rajeev Thakker, Chief Risk Officer. I will now hand over the call to Aseem for his opening remarks, and then we'll open the floor for Q&A. Over to you, sir.

Thank you, [ Dinesh ], and good evening, everyone. As our standing in credit markets with lenders has improved over the years, we have been able to avail new loans at better interest rates as well as diversify our lenders. Aided by the transmission of repo rate cuts, our cost of funds has come down by about 90 basis points year-on-year. Cost of operations have been calibrated in a downward-sloping curve, and we continue our guidance of a 25 basis point reduction this year over the 150 basis point reduction we have delivered since listing. Cost of credit will remain range-bound. The U.S. 10-year bonds may force Fed rates on their hand for a rate increase. Independently, India's currency market situation could also force RBI's hand sooner. Independent of repo, deposit rates have firmed up, and as banks deposit growth continues to lag lending, interest rates in India will have an upward bias, and we could arrive sooner if crude continues to push $100 and stays above it longer. One thing is abundantly clear, it is impossible to crystal gaze into what will happen. We are living in a strange world. If you look at the 30-year, the U.S. bond market is sitting in a 2008 crisis level, even as the stock market continues in a bull spread. Geopolitical uncertainties and India's mother-of-all-problem oil, one doesn't know directionally what to pencil in. So the only clarity we have is that we have to prepare for what cannot be anticipated. In our antifragile approach build, we always remain cautiously optimistic. We have taken steps needed to ensure that we keep walking the guided path with metronomical consistency. Our premise at SBFC from the start has been that acceleration and deceleration both put load on the engine and create heat and fuel waste. What's important is steady momentum. For 30 quarters, we have delivered this through system shocks created by successive failure of financial companies, COVID waves one and two, interest rate rides up and down. When we did our strategy meeting, charting out our growth from INR 10,000 crores to INR 20,000 crores, we concluded that the risks ahead never remain the same. The external challenges change. The internal challenges also change, but we will endeavor to keep a steady pace through all the crosscurrents we face. Our approach continues to be learning from our mistakes using analytics and technology and onboarding better customers. Managing risks better and keeping a superior provisioning, which is currently 2x regulatory minimum. As we have in the past and in the future, we also remain focused on spreads, NIMs, ROAs and ROEs, as we believe that consistent profitable growth is our North Star. With that, I hand over the call to Mahesh.

Thank you, Aseem. We entered the first quarter of 2027 with multiple headwinds. Interest rates were volatile in March, and with the global situation continuing to write its own script, we had to plan our borrowings with more prudence than usual. Measure twice, borrow once. Second, gold prices were on a declining trend, and with new regulations effective April 1, 2026, resetting eligibility norms, the loan amount landing in customers hands came down accordingly. Less shine, less size, so to speak. Third, the regulator circular mandating banks not to accept collateral security for MSME customers within the INR 20 lakh ticket size had a direct bearing on our co-origination, which accounts for roughly 20% of our disbursal and book. Lastly, a few birds strayed on the badminton court, by which I mean competitors showing up with competitive pricing or generous loan amounts, which simply made us adjust our footwork. Despite all this, the underlying business held its ground. AUM grew 6% for the quarter at 27%-odd for the full year at INR 11,922 crore. MSME disbursements rose 3% quarter-on-quarter to INR 809 crore. Following the revised guidelines, the co-origination mix reset to 10%. This has since stabilized, and we expect a return to the usual run rate from this quarter onwards. On the household side, the incomes haven't materially changed over the year, but inflation has quietly eaten into the disposable income, denting repayment capacity. We've seen this show up in our login to disbursal conversion, which moderated to 34% from 42%. This isn't just our anecdote. The RBI's FSR report June 2026 echoes the same pattern, noting that nearly 60% of lending is now flowing towards consumption rather than asset creation. The sub-INR 10 lakh segment in particular is showing signs of leverage stress and warrants close monitoring. We have the distribution and gunpowder to push the pedal right now, but we 'd rather scale this the right way than rush it. We were deliberate about pricing through the quarter, which meant walking away from some business rather than chasing it at any cost. Capital allocation discipline helped us protect spreads, which improved by 39 basis points at 9.4%, driven by both a lower cost of borrowing and better pricing on the asset side. NIMs moved up by a similar basis points as spreads, and stood at 10.6%, even as absolute borrowings increased, proof that growing the balance sheet and protecting the margin aren't mutually exclusive, just occasionally in tension. OpEx came in at 4.29%, down 30 basis points year-on-year, though sequentially higher than March, largely on account of increments and full year cost impact of branches opened over the last two quarters. As a result, our PPOP improved 7.3% quarter-on-quarter and 34.4% year-on-year. On asset quality, 0+ rose by 70 basis points during the quarter, and that's our homework for the current quarter. The momentum on rollbacks is better, and we should stabilize here for a quarter before a pullback in the subsequent quarters. NPAs improved 12 bps year-on-year to 2.66%, though up 5 bps sequentially. As flagged in our last call, we took stage 2 ECL up to 16% from 6%, bringing total provisioning to assets at 1.91%, the highest we 've taken to date and roughly twice the regulatory requirement. We d rather overinsulate the P&L now than explain a surprise later. Call it prudence with a margin of safety. In a secured book, this level of coverage appears to be amongst the highest in our peer set. PAT stood at INR 130 crore, up 6% quarter-on-quarter and 29% year-on-year, marginally outpacing book growth. That gap reflects the combined efficiency of risk-adjusted pricing, disciplined borrowing costs, and distribution, each working together. We closed the quarter at 14.7% ROE, and our guidance for the coming quarter remains unchanged on all fronts. No surprises there, burrs on the badminton court notwithstanding. With that, I 'll hand it over to Sanket to walk through the detailed financials for the quarter and the year-on-year performance.

Thank you, Mahesh. Good evening, everyone. In terms of business, our total AUM for June 2026 is at INR 11,922 crore, with a growth of 27% on year-on-year basis and 6% on quarter-on-quarter basis. Our MSME AUM is at INR 9,271 crore, which has increased 4.5% on quarter-on-quarter basis. Our MSME disbursement for the quarter stands at INR 809 crore, which has increased 3% on quarter-on-quarter basis. The loan against gold AUM is at INR 2,631 crore, with a growth of 11% on quarter-on-quarter basis. We added 5 branches during the quarter, bringing the total branch count to 256 as on June 2026. In terms of yields and margins, our yields for the quarter is at 17.9%, with a reduction of 9 basis points year-on-year, and an increase of 29 basis points on quarter-on-quarter basis. Our cost of borrowing for the quarter is at 8.42%, which has reduced 90 bps year-on-year and 10 bps quarter-on-quarter. Consequently, our spread for the quarter is at 9.48%, with a growth of 81 basis points on year-on-year basis and 39 basis points on quarter-on-quarter basis. In terms of borrowing and capital allocation -- capital position. We have upfronted borrowings in the macro environment and thus having a closing liquidity of INR 1,864 crore. As we grow towards INR 15,000 crore, we intend to keep higher liquidity on the balance sheet. Given the movements in bond yields during the quarter, the CD rates, and the overall cost environment, we think we should now stabilize on the cost of borrowing at current levels. Our capital adequacy ratio is sufficient at 32%, with tangible networth at INR 3,613 crore as of June 2026. In terms of cost, our OpEx for the quarter is at 4.29%, which is 36 basis points increase on quarter-on-quarter basis. This is largely due to increase in branches in the last quarter of FY 2026 and the impact of increments rolled out for the year. As the AUM grows on these set of branches, we will start to see the cost to average AUM coming down, and we should be closer to 4% or below at the end of the year. The guidance for the year of 25 bps reduction remains unchanged. In terms of asset quality, our GNPA is range bound at 2.66%, which has reduced by 12 bps year-on-year and increased 5 bps quarter-on-quarter with a PCR of 42%. Our credit cost for the quarter is at 1.45%. We expect it to remain in this range in the short term. In terms of return ratios. Our return on average AUM is 4.53%, with ROE at 14.73% for the quarter. Our PAT for the quarter is INR 130 crore, growing 29% year-on-year and 6% on quarter-on-quarter basis. With this, we open the floor for questions and answers.

[Operator Instructions] We have the first question from the line of Renish.

Sir, congrats on a good set of numbers. Just 2, 3 things. One, the Mahesh's comment about the over-leveraged position in sub-10 lakh ticket size. So where do we stand in terms of cycle in that particular product? Are we at this end of the cycle or we are in the middle of the cycle?

Sorry, we missed you in between. Can you just repeat the question?

Yes. So Mahesh, you did mention that sub-10 lakh ticket size, there is still some sort of over-leveraging which is visible and sort of which requires close monitoring, so according to you, where do we stand in terms of cycle? And also, how it should impact SBFC's growth plans or maybe the overall profitability metrics in FY '27?

Yes. So I think from our earlier commentary and what I had articulated in the call earlier today, we 've not seen the situation improve in the sub-INR 10 lakh category. And even on the new origination front, if you probably look at our presentation, you will see that most of the CIBIL scores are now more than 700 and almost 90% of the portfolio have a score of more than 700. But despite that, our throughputs have dropped from almost 42 to 35. So effectively, which means that a lot of these customers where bureau scores are more than 700 are still not passing through the filter. One strange thing that's actually emerging is that you have scores, but eligibility is not passing through your filters, which effectively means that you might have a score, but the amount of credit that's been seeked is still extremely high. So that's the reason we're a bit watchful on that segment. If you would see that our average ticket size is inched up compared to last year or last quarter versus this quarter, and that's largely because the shift that's beginning to happen from that segment.

If you see, Renish -- if you had seen the latest CLSA report on the household DSR in India are now almost touching 14%, which is one of the highest in the world. So while people look at retail to GDP, which also is now pushing 45%-plus and they 're really high, but what is concerning is the DSR. So clearly, the signals are saying that you be watchful. It is not that we are seeing anything that worries us or concerns us. This is part of the business we do, and our job is to be a little worried. That's part of our job description. If we are not worried, you should be very worried. So we have to be careful because we don't know when cycles turn. We really don't know if you 're on the start of the cycle or the middle of the cycle. These are all guess works. In reality, you have to be watchful, and if you are seeing signals in your customers that there is a buildup of leverage, then you better be watchful rather than be sorry later.

Got it. And my second question again on this, the journey from INR 10,000 crores to INR 20,000 crores. So till now, we have been stuck to 2 products, right, the small ticket and gold loan. Do you feel that over next maybe 12, 18 months, we need to think about adding new products to build a more [indiscernible] do you think there is enough white space at least in these 2 products in which we operate, and hence, it s not right time to think about new products?

No, we keep doing what we are doing. We have to get better at what we are doing. We still have a lot of work to do in that. We will keep focusing. We have learned something over the last 8 years, and once you have learnt it, hopefully over the next 8 years, you will better it. We don't want to at this stage look at anything different or new. We will continue doing what we are doing. Hopefully, we will do it better than what we have done so far.

[Operator Instructions].

Either we've been very clear or we have confused everyone.

We have the next question from the line of Meghna Luthra from Incred.

Congratulations for a good set of numbers. I just had a few questions. One is around the employee cost. Is the increase in employee cost largely based on increments and bonuses, or is there anything else to read in it?

So Meghna, there are 2 things that have happened during the quarter. One obviously is the rollout of increment that has happened. That has one impact. The second is that last quarter we opened close to 20, 25 branches. Again, this quarter we've added 5. So all that employees that we've hired, full-blown cost has come in, in this quarter. So both put together is the increase in that cost. What will happen over a period of this next 9 months is that once those employees become productive and we add it on the AUM, you will tend to see the cost to AUM starts to coming back where we intend to.

Got it. The second question was on the yield front. Although we have just inched up our ticket size marginally during the quarter, our yields have improved by 30 basis points. Do we see like a similar effect because we are incorporating higher risk and that's why we have increased our yield on -- because of the risk?

I think what happens is that we in our model have baked in a spread of 9% since last one year and said that this 9%-something we have to hold to ensure the return metrics make sense for us. To that effect, what happens is between products, there are some yields improvement, some reductions. So gold in this quarter has done a better job in terms of yields, so that has added to the yield improvement of 29 basis point. But the range that we are looking at should be in the range of 17.5% to 17.75%. That's our range where the yields generally stabilize. One good quarter of either product gives a 10, 15 bps up and down. So that's the range we will be at and which ensures that at, say, current cost of funds, 10 bps up and down will give you a spread of more than 9%. So that compensates more than enough for your risk-adjusted pricing and gives you the desired return ratios.

Okay. So largely related to the gold portfolio that we are seeing a spike during the quarter. It s a one-off, right, in the yield?

Yes. It keeps moving slightly up or down on the gold front, but the stable yield what we can see is between 17.5% to 17.75%. That's the company yield which is largely we bake-in internally.

Got it. And what would be the branch expansion plan during the year?