Suryoday Small Finance Bank Limited (SURYODAY) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Q1 FY '23 Earnings Conference Call of Suryoday Small Finance Bank Limited hosted by Elara Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Shweta Daptardar from Elara Securities Private Limited. Thank you, and over to you, ma'am.

Thank you, Michelle. Good morning, everyone. On behalf of Elara Capital, we welcome you all to the earnings conference call of Suryoday Small Finance Bank Limited to discuss the Q1 FY '23 earnings performance. From the esteemed management, we have with us today Mr. Baskar Babu Ramachandran, MD and CEO; Mr. Narayan Rao, Chief Services Officer; Mr. Kanishka Chaudhary, Chief Financial Officer; Ms. Radhika Gawde, Investor Relations. Without further ado, I now hand over the call to Mr. Baskar Babu Ramachandran for his opening comments, post which we can open the floor for Q&A. Thank you. And over to you, sir.

Thank you, Shweta. Good morning, everybody. On behalf of Suryoday Small Finance Bank, I extend a warm welcome to everyone to our Q1 FY '23 earnings call. I hope everyone had a chance to go through our investor presentation for the quarter ended June 30th, 2022. The fiscal year 2023 has begun as the dawn of the new beginning for the world as the effects of pandemic are receding and people are experiencing normalcy in the post COVID era. The global economy is witnessing a paradigm shift in terms of macroeconomic factors, which are inflation, interest rates, et cetera. The central bankers across the globe are worried about increasing inflation, which is primarily due to rise in crude oil and other commodity prices. The sharp inflation has further impacted interest rate scenario, which could impact growth in the near future. The Indian economy, however, has been intact and amidst all these hurdles, the demand in the economy is intact and consumer spend in terms of festive spends, traveling, et cetera, is growing. The country is expected to have a normal monsoon, which augurs well for the rural economy. India is an integral part of the global financial ecosystem and cannot be immune from the macroeconomic problems evolving in the world economies. The surge in inflation has forced the RBI to increase the repo rate and withdraw accommodative policy stance. RBI has recently increased the repo rates by 50 basis points to 4.9 percentage and the cumulative rise now stands at 90 basis points from 4% to 4.9%. We are happy to announce that our [ AUM ] growth has increased by 28.2% over the last year to INR 5,132 crores in Q1 FY '23 on a year-on-year basis. There has been a healthy customer addition as well with total customer base reaching 20.1 lakhs, a growth of 31.5% against the numbers in Q1 FY '22. On the profitability side, the bank has turned profitable and reported a PAT of INR 7.8 crores during the previous quarter as compared to a loss of INR 47.7 crores in FY -- in Q1 of FY '22. Let me give some highlights on our operational metrics for the quarter, Q1 FY '23. The disbursals for the quarter has grown by 180% to INR 1,012 crores as compared to INR 360 crores in Q1 FY '22. The bank continues to disburse loans to new customers throughout, emphasizing more in disbursing loans to our existing customers with regular repayment cycles and healthy credit history. The focus is on retaining our existing inclusive finance customers. We are also onboarding new customers in the micro as well as in the non-micro loan sector and expanding the affordable housing market portfolio. Our collection efficiency is improving sequentially on the back of opening of the economy and nearing normalcy. The bank's one-EMI adjusted collection efficiency stood at 89% as on 30th June compared to 87% for the month ended 31st March, '22. The collections vertical is one of the most important verticals for the bank and hence, we have created a special team of 400 collection officers on a pan-India basis to focus on recovery from stressed and restructured book. Our gross advances grew by 28.2% to INR 5,132 crores on a year-on-year basis. As at the end of June, inclusive finance comprises of 66.9% of the asset book, while affordable home loans, commercial vehicles and secured business loans comprised 8.8%, 6.7%, and 4.7%, respectively. As a strategy, we have been increasing our secured finance portfolio gradually over the last few quarters. Going forward, Suryoday plans to maintain a portfolio mix of 55% and 45% ratio towards inclusive finance book and other secured loan segments. On the deposit front, our deposit -- total deposits witnessed a growth of 18.2% to INR 4,019 crores as of 30th June, '22. Retail deposits form 78.8% of our total deposits and the balance comprise of bulk deposits. Furthermore, 100% of our bulk deposits are noncallable in nature. CASA improved to 20.3%, which is in line with our granular retail strategy, excluding CDs of INR 127 crores. On the borrowing front, we had -- at the end of June '22, we had 31.5% of our total liabilities, majority of which was from refinancing institutions. On the distribution front, Suryoday is spread across 564 branches, of which 92 branches were liability-focused, while 359 branches are asset-focused and the balance comprises of URCs. Through this branch network, bank has serviced [ 20.1 ] lakh customers, of which asset customers were 16.5 lakhs, and total liability customers were 15.5 lakhs. On the asset quality front, our GNPA, as of 30th June, '22, stood at 10% compared to the GNPA of 11.8% as on 31st March, '22. The net NPA stood at 5% as against 6% in March '22. Our provision coverage ratio as of 30th June stands at 75.1%. Our delinquency in the portfolio has declined sequentially on the back of improved collections efficiency. Our PAR 90 plus portfolio as of 30th June stands at 6.4%. Our total standard restructured pool currently is 6% of the advances as of 30th June. Our collection efficiency on the restructured book and on the NPA book has been steadily rising, and we'll give the numbers as we go through the presentation. On the earnings side, our net interest income increased by 9.8% year-on-year to INR 135.6 crores in Q1 FY '23. Our net total income increased by 16.5% year-on-year to INR 169.6 crores. The net interest margin stood at 9.1% for Q1 FY '23 compared to 7.6% for Q1 FY '22. Our other income mainly included income from sale of investments. Cost of funds reduced to 6.4% in Q1 FY '23 compared to 7.4% in Q1 FY '22 and 8% in Q1 FY '21. Cost to income within the same period moderated to 58.3% compared to 63.5% in Q1 of FY '22, which was primarily due to the rise in income, coupled with lower cost of borrowings. The company reported a profit of INR 7.8 crores in Q1 FY '23. As on June '22, we continued to hold a floating provision of INR 91.3 crores in our books. We continue to maintain a high capital adequacy. As of 30th of June, our capital adequacy of our bank was 36.4% as compared to 37.9% as of FY '22. Tier 1 comprises of 33.5% and Tier 2 comprises of 2.9% of the overall [ Tier ] capital. There is significant stress on digital front in Suryoday. Our digital transformation program, Pragyan, is on the verge of completion and expected to go live in August '22. The bank is migrating its core banking solution to Finacle, the industry leader in digital banking solutions and has partnered with Kyndryl to support and manage the bank's datacenters, infrastructure, applications, securities, et cetera. The bank has partnership with 3 payment banks, Paytm, Airtel and Fino for an end-to-end digital process for current accounts, savings accounts, sweep accounts and also fixed deposit mobilization relationship with Fino Payments Bank. The bank is engaged with various fintechs for deposits, loans, investments and insurance products with an entirely digital process and a superior customer experience. Talking about the new initiatives in FY '23, Suryoday had launched Vikas loans to offer an end-to-end digital service for our inclusive finance customer. This forms, today, 20% of the total inclusive finance portfolio. Collections of the EMI in this portfolio is through the customer's savings account, 4.5 lakh customers have been identified for the Vikas loan product. The other offering is small ticket fixed deposit with a minimum of INR 1,000 to customers through our customer service points with a turnaround time of 100 seconds. These products provide a seamless digital experience and saves time for the customers. We have opened, as on date, 4,800 deposits with a value of INR 7.5 crores through this channel. Just to summarize, our endeavor is to grow our loan book by approximately 25% during the current financial year. The company plans to increase the share of secured lending in the overall product mix. We plan to achieve INR 400 crores of new business per month post Q2 of FY '23. We see a clear growing opportunity in graduating our inclusive finance customers and the focus in terms of delivering customer experience through digital initiatives. We plan to expand our presence cautiously in new states and strengthen our foothold in the existing states. Going forward, we target a INR 40 crores operating profit on a monthly basis from end of Q2 FY '23 with focus in terms of reducing our NPA over the next few quarters. Thank you. Over from us. Over to you for any clarifications.

[Operator Instructions] The first question is from the line of [ Priyanka Shah from KK Advisors ].

I just have one question. What are the plans in term of geographic expansion in FY '23?

Thank you, Priyanka. We are currently present in 14 states and our focus this year is in terms of deepening our presence in existing states rather than opening up newer geographical states. We have very marginal business in states like Telangana, Rajasthan and even Uttar Pradesh. We intend to increase our presence in these states with little more branches than increasing our footprint in newer geographies.

[Operator Instructions] The next question is from the line of [ Raj Joshi from Ace Securities ].

Sir, what is the overall collection efficiency as on 30th June?

It is 89%.

And sir, we had inducted 400 collection officers. So how has been the experience so far?

Yes. So this collection team was inducted to basically activate all customer accounts with irregular payments and which had slipped into NPA. We have been progressively activating the customer accounts and started our collections. We do about INR 6 crores of collections on an average. Our endeavor is to be able to reach INR 10 crores per month and above in about 2 months' time.

Okay. And sir, the RBI has increased the repo rate twice in the financial year so far. So where do you see our cost of funds from 6.4% going forward?

So if you look at our overall funding mix, about half of further funding is coming from our deposits. So we expect that there will be marginal increase in our cost of funds in the latter half of the year from here on. But to a large extent, we don't expect our cost of funds to go beyond 25 basis points.

So you said [ 25 ] basis points, right?

That's correct. Yes.

[Operator Instructions] The next question is from the line of [ Devendra Pandey from DP Advisory ].

So I have a couple of questions. So my first question is on the overall micro finance market. So how is it shaping up?

What we are seeing across the industry is in terms of new customer addition has come down sharply to the industry. Company-to-company, bank-to-bank based on our strategy, there has been an increase in customer base. Currently, as we reported, we are seeing a strong momentum, including in terms of new-to-bank, not necessarily new-to-credit customers, while our focus has been in terms of both retaining our good existing customers with products like Vikas loans, at the same time also for new customers in newer geographies where we entered last year, which includes Rajasthan and a little deepening in other states. The portfolio behavior of the new portfolio across the industry seems to be inching closer to 99% in terms of collection, predominantly driven by focused funding to existing well-paying customers who have paid through both COVID 1 and COVID 2, which, at the industry level, probably constitutes around 85% of their overall customer base, which existed as of 31st March, 2020. This is how the industry is panning out. Overall, I think with the new norms coming in, the focus will be in terms of retaining well-paying existing customer, and we will likely to see a reduction in the pricing as the customer starts making even the repayments through the digital mode. We currently have 20% of our portfolio in inclusive finance where entire repayment is coming through the savings bank account of the customer. It still requires a follow-through in terms of calling them up before the due date and ask them to remit money. When that becomes digital, the operational costs are likely to also come down. And this probably will be the trend you will see across many -- all the small finance banks and probably even through the microfinance institutions. So the industry is looking robust, but I think it's cautiously optimistic in terms of growth. And depending on the strategy of each company, the focus will be either in terms of acquiring newer customers, but at the industry level, there is a tapering of new customer acquisition, as you can see from the data.

Got it, got it. And do you see any stress in the rural markets, especially considering the sustained inflationary environment in last 2, 3 quarters?

See, always -- usually any of the impact happens with a lag in terms of inclusive finance segment. As far as Suryoday is concerned, we have 35%, 40% in terms of rural and the remaining majority of it is urban and semi-urban. We had the impact severely in terms of COVID 1 and 2 when the metros and urban centers were substantially impacted negatively. So probably it will be a balancing, but at this point of time, are we really seeing any stress in our books or in terms of data at the macro level for the new portfolio? It is not it.

[Operator Instructions] The next question is from the line of Ashlesh Sonje from Kotak Securities.

One question on Slide #18 of your presentation, where you have given the portfolio addressed numbers. If I subtract the PAR 90 number of 6.7% from the PAR 1 plus number, I get a PAR 1 to 90 of around 6.7%. If you can -- can you just tell me what part of it is in the restructured book so that I can look at it separately?

This part of 1 to 90, is it?

Yes. So I just want to look at PAR 1 to 90, ex restructuring.

1% of the overall assets, and in terms of restructured, it will be around closer to 10% of the restructured book will be in 1 to 90. We can also give you the full data, but as I understand, now it's around INR 50 crores in which INR 510 crores is the restructured book, of which around INR 300 crores is the standard restructured book. So you have to take it as a percentage of standard restructured book is around 15%. If you take it as an overall restructured book, it's around 10%.

Okay. So about 1 percentage of the PAR 1 to 90 is restructured. Is that right?

No, no. Overall portfolio.

Okay, okay. Understood. And secondly, sir, on the impact of the new guidelines for micro finance, just wanted to check where we are in that process and what impact we have seen in acceptance/rejection rates?

The challenge is in terms of combining the entire household obligation, which the credit bureaus are working and expected to deliver by end of this month or latest by September-mid. So currently, we have -- we are taking out the credit bureau reports of the customer separately, and we have partially -- substantially implemented it. We do believe that the full implementation will happen well before the month -- the end of August or beginning of September. But otherwise today, it's a workaround in terms of you'll have to pull out the various bureau reports, combine it to find out the household obligation. And once the credit bureau start giving a combined report of obligations as well as in terms of income, it will become far more easier in terms of implementation. But otherwise, it's a workaround and almost 90% is implemented.

[Operator Instructions] the next question is from the line of Ms. Shweta Daptardar.

A couple of questions. If I look at our network presence, it's actually spread across top industrial states, be it Tamil Nadu, Maharashtra, MP or Karnataka. But if I look at the GNPA trajectory, it's remained slightly sticky for a while now. So could you explain, now that the pandemic challenges are behind, what is it that's hampering? That's point #1. My second question is, so if I look at your cost of funds, so that has been improving. You also mentioned in your opening comments that we do not see much spike from here. So what are the weighted average costs? And how -- do you see the mix tilting, going forward? And one last question from my side is, so you mentioned in your opening comments that you are up for increasing your secured lending base. So what is the strategy like going forward to do so?

Thank you, Shweta. Well, in terms of stickiness of our GNPA, which is a [ good ] 11.8% and 10%, was almost all -- completely all of that is coming in from the pre-pandemic generated portfolio. We have a strong business in urban markets like Mumbai, Pune, which were far more impacted negatively during the pandemic. And what that did also is a little bit of a dislocation of the customer from [ their kind of residences ]. So after filling back, which is where we have put up 400 force, the primary intent of the specialized focused collection force is that it does not really give bandwidth to a regular relationship officer to also follow through with the customers where the chain of repayment has been broken. It requires more than 3 of 4 visits. But what we're really seeing, which is very encouraging, is that the customers who have not even paid for 6 full months with the continuous [ cycle has started saying ], once they're in the microfinance segment, customers start paying even 3 installments regularly, even within 1 or 3 or 4 installments out of 5 or 6 installments, which have fallen due. It is not likely to end up in a credit loss. It is likely to end up only with a delayed closure of the loan. So which is why we are really focusing on it. And we hope that the broad thing, as we guided last time, is over. And because the overall portfolio itself has shown to closer to 30%, the main thing we'll have to look at in our kind of business or a comparison for our portfolio is that the current portfolio for us only constitute 60% after the post-pandemic. If this were to be a little higher at 70% or 75%, 80%, as a percentage, the GNPA would look lower than what it is looking at this point of time. We will do an organic resolution of the GNPA and we are currently around close to 40% of our NPA customers are paying customers. They are not necessarily paying every month. They're paying for 2 installments out of every 3 months. They will continue to be tagged as NPA till such time all the installments are cleared or the loan comes to a close, but around 40% of that is what we are really focusing in terms of getting it. It's around -- of the INR 515 crores, closer to around INR 200 crores to INR 225 crores is a portfolio which will not end in credit loss, but we [ recorded the time line ]. In terms of our cost of borrowings, I'll ask Kanishka to take the cost.

So as we have indicated, our overall cost of funds today, it's around 6.4%, and it has held from quarter-on-quarter. If you look at our funding book, our deposit and borrowing ratio is around 60:40. So given that particular mix and how we see the rates moving, we expect that our cost of funds will be in the range bound by around 25 bps more.

While our current cost of funds is at 6.4%, the incremental cost of -- even in our mobilization currently is around 6.6%. So not likely to kind of shift dramatically, not certainly more than [ 25 bps ] overall, if at all. And in terms of your questions on the secured loan portfolio, we have launched micro home loan, which is a space which is reasonably vacant, which is between INR 5 lakh to INR 10 lakh of funding, given we see many of our affordable home loan companies have moved to ticket sizes over and closer to INR 8 lakh-plus. And predominantly, this is coming out of our inclusive finance customer segment, not necessarily our existing customers. Currently, the run rate pie is around INR 5 crores per month, and it's on an acceleration [ that were INR 4 crore ] per month increased disbursements. We are seeing this business as a INR 25 crores to INR 30 crores disbursement per month, granular, average ticket size probably less than around INR 7 lakhs with multi-income schemes in the family. And in a small portfolio of INR 22 crores, obviously, this is not a correlation to increase it, but usually, the billing quantities are very closer to 0 than anything significant in this portfolio because of the intensity of collections and the customers having substantially good track record in the inclusive finance segment and probably in a little bit of retail also. So we see that as a growth engine, closer to around INR 30 crores per month towards the end of the financial year. Our regular home loans and secured business loan portfolio currently is clocking around INR 45 crores per month, average of around INR 45 crores to INR 50 crores. The intent is to also increase that disbursement to around closer to INR 75 crores to INR 80 crores in 2 quarters from now. So a combination of around INR 110 crores would come in from affordable home loans, secured business loan as well as from micro home loan. That's how we are running. With the same disbursements in micro finance loans at around INR 350 crores, and that disbursement at around INR 100 crores, not including other products like digital partnership products, the portfolio mix, what we have kind of projected in terms of 55-45, will happen.

The next question is from the line of Mr. Renish, an individual investor.

This is clarification. I'm not individual investor. I'm from ICICI Securities.

May I know your company name, please?

ICICI Securities. So a couple of questions from my side. So one is on the liability piece. So I mean if you look at the deposit profiles for last 7, 8 quarters, it has been static around [ 38 billion-odd ]. And even if you look at the liability branch addition, so practically, we have not added a single branch since COVID onset. So sir, what is our medium-term outlook in terms of the branch expansion on the liability side? And does it make sense after converting into SFB, we are still, let's say, 40% funded by the borrowings?

Sure, Renish. In terms of what we're trying to do now is converting many of our branches into composite branches, which means that including in the [ 92 ] branches, around 26 are composite branches. We are making more of our inclusive finance branches, which are infrastructurally ready for kind of having liabilities business. Instead of just focused only on liabilities, they will have the 2 divisions within that, one focused on liabilities and one of the assets. So intent is to really increase it to at least by 50 branches. During the financial year, we'll do around 10 per quarter or even including 10 to 15. In terms of our borrowings, we have a conscious strategy of managing an ALM in the formative years of the bank. While most of our borrowings at this point of time come in from NABARD and SIDBI and the cost of funds very close to our overall weighted average cost of funds, except for the [ FLTRO ], which we took at 4%. Other than that, it's marginally just about the same with a liability period of around 3 to 5 years. So as a strategy, we decided to have, from a behavioral point of view, all deposits get converted into behavioral contracts and time bound. But as far as the banks are concerned, we said 50% of our book would be in terms of deposits and gradually increase it to 100%. And refinance, we'll have, consciously, the strategy of approximately around closer to 30%. So now as the deposit base is growing, and we're also growing, that gave us a space to reduce our reliance on bulk deposits. Current year bulk deposits construe 20%, 20%. If we have to really increase our -- reduce our CD ratio or increase the deposits, one opportunity would be in terms of tapping the bulk deposits, which have gone slow over the last 3 or 4 quarters. But our focus would be granular, term deposits from the -- including in the existing inclusive finance segment as well as converting our branches into composite branches. So you'll see around closer to 50 more branches becoming liability focused in this financial year.

Yes. But sir, I mean, if we look at the -- some of the peer SFBs, we have not yet seen the MFI branches contributing meaningfully to the depots base. So I mean, let's say, whatever branches we have converted so far, if you can just highlight what is the average balance in those accounts versus the balance in the typical liability branch set up.

Branch, I don't have an overall number, I'll circulate it back. But of the 26 branches -- composite branches, they will be no significantly different from only liability focused branches because the team is separate, which is focusing on the deposits. They just happen to operate from the same centers. But any branch where we open as a composite branch within a year, on an average, they contribute around closer to INR 15 crores to INR 20 crores of deposits, around 70% to 80% coming in from term deposits and around 15% coming in from customers.

Got it. Got it. Okay. Sir, and the last question again is on the asset quality side. So even if we, let's say, keep aside the MFI book wherein we have witnessed a sequential decline, but rest of the segments we are still witnessing a sequential increase in the gross NPA number, be it HBL, housing loans. I mean rest of all the products have witnessed a sequential increase and this is now like 9 quarter after the COVID. So if you can throw some light, what is happening in the rest of the portfolio would be helpful, sir.

In the other portfolios, it has been pretty steady and declining except for a spike in the month of June, out of a few large accounts, getting timestamps [ with the NPA valuer ] in the 60 to 90 for the last 3, 4 months that have spiked out in terms of June. As of July, there has been a pullback in the other products, other than JLG. So confident that the GNPA level will be back to less than March levels in the other products. And in JLG, we'll have to have a residue portfolio as we always guided so that we are in the process of partial recovery and part of that will go towards [ pay plus ]. However, we currently are sitting on -- our entire nonpaying portfolio, so to say, is around closer to INR 400 crores, which is the customer has not made any payment in the last 3 months, which we have still not written off. Against this, we are having a -- currently a provisioning of around INR 325 crores. The gap on that basis of nonpaying to paying, that nonpaying could also -- the customers who are not yet NPA -- not necessarily they're only NPA customers, the gap is around INR 75 crores is uncovered provision, as we speak. In terms of non-JLG products, we do not see any increase that could happen over the March levels by September. There was certainly a spike in the month of -- in the quarter of June.

Got it. And sir just last data keeping question. What is the total write-off we have done in Q1?

We have done a total of INR 131 crores in this particular quarter, and it's entirely in the JLG book. This basically represents customers who have not been paying us for more than 6 months.

And if you can share the FY '21, FY '22 write-off number, if you have it with you right now?

We wrote off around INR 218 crores in FY '22 full year.

INR 218 crores.

Yes, INR 218 crores.

And '21?

So total write-offs across the 2 years will be around INR 340 crores.

Okay, which is including current quarter number or?

No, this is up to March. So the total is INR 340 crores and another INR 130 crores of the current quarter.

[Operator Instructions] As there are no further questions, I now hand the conference over to Ms. Shweta Daptardar for closing comments.

Thank you. On behalf of Elara Capital, we thank all and the management of Suryoday Small Finance Bank who gave us the opportunity to host their earnings call. Thank you so much.

Thank you. On behalf of Elara Securities Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.