AUBANK - AU Small Finance Bank Limited Share Price

Management Outlook:
AU Small Finance Bank anticipates continued economic challenges, including liquidity deficits and inflationary pressures, but remains confident in its secured asset portfolio and deposit franchise. Key expectations include:

• Credit costs to remain elevated (particularly in MFI and unsecured portfolios) but within the guided ROA range of ~1.6% for FY25.
• Loan growth of ~20% for FY25, driven by secured retail assets (23-24% growth) and commercial banking, offset by de-growth in MFI and credit cards.
• Deposit growth of ~15% YTD (twice the industry average), with a focus on optimizing CASA (31% ratio) and stable deposits (80% of total).
• Cost of funds expected to remain at the lower end of the guided range (7.10-7.15%) despite competitive pressures.

Major Points:

1. Deposit Strategy: Focus on urban branches (top 20 cities), integration of Fincare branches, and product diversification (wealth/insurance).
2. Asset Quality:
   • Retail secured assets (67% of loans) show robust growth (wheels, mortgages) with stable credit costs (1.1% for wheels, 0.6% for mortgages).
   • MFI portfolio (7% of loans) faces challenges (4.1% GNPA, 5.4% credit cost) due to customer over-leverage; recovery expected post H1 FY26.
   • Credit cards/unsecured loans under recalibration (9.2% credit cost) with tightened underwriting.
3. Profitability: Margins at 5.9% (down 23 bps QoQ due to liquidity/mix), cost-to-income ratio at 54% (Q3), and FY25 target of 57-58%.
4. Universal Bank License: Application under RBI review; progress hinges on regulatory timelines.
5. Integration Synergies: Fincare merger synergies (branches, tech, leadership) to drive operational efficiency and southern market expansion.

The Bank remains focused on balancing growth with asset quality, leveraging its secured lending expertise while addressing near-term challenges in unsecured/MFI segments.

Question 1:
What is the extent of further pain expected in MFI, personal loans (PL), and credit cards, given current SMA levels and customer indebtedness, and how are collections being managed?
Answer: MFI credit costs may reach 6-7% annually, with elevated slippages in Q4. Credit card underwriting tightened, limits reduced, and misuse categories blocked. December collections improved, with expected stabilization in 1-2 quarters.

Question 2:
What provisions are held against the MFI SMA book, and how will Fincare merger synergies impact FY26 opex amid branch expansion plans?
Answer: Standard provisions apply to SMA; a Rs.17 crore contingency remains unused. Fincare integration (branches, leadership, tech) will drive operational efficiencies. FY26 cost-to-income aims for ~55% via productivity gains, with limited new infrastructure costs.

Question 3:
How confident is AU Bank in secured asset quality improvement for Q4, and how will opex trends evolve with collection investments?
Answer: Secured assets (wheels, mortgages) remain stable with no contagion from unsecured stress. December collections outperformed, with seasonal Q4 recovery expected. Opex focus: tech-driven efficiency, variable cost control. FY25 cost-to-income guided at 57-58%.

Question 4:
Will AU Bank recalibrate its strategy toward secured lending given challenges in MFI/credit cards, and what is the ROA roadmap?
Answer: Unsecured lending (capped at 15% of loans) remains strategic. Credit card/microfinance are cyclical learning phases. ROA improvement hinges on rate cuts reducing funding costs. Long-term 2% ROA target stays, contingent on macroeconomic easing.

Question 5:
Why was FY25 growth guidance cut to 20%, and how was funding cost guidance lowered despite industry pressures?
Answer: Growth adjusted for economic slowdown (6.3% GDP) and reduced MFI/credit card exposure. Deposit franchise optimization (CASA focus, branch productivity) kept funding costs at 7.05-7.08% YTD. Asset growth aligns with system liquidity (20% YTD).

Question 6:
How will slower MFI growth impact PSL compliance, and what opex trajectory is expected post-Fincare synergies?
Answer: SMF/Agri lending (via MFI, FPOs) meets PSL needs. Synergies (closed Fincare HO, IT integration) limit FY26 opex growth. Cost-to-income to decline gradually via digital efficiency, offsetting 70-80 new branch additions.

Question 7:
How do RBI's gold loan regulations create opportunities for AU Bank?
Answer: Rules (branch-only processing, no renewals) level the field with NBFCs. AU leverages Fincare's gold expertise, lower funding costs, and trust advantage. Expansion planned via integrated distribution.

Question 8:
What is the strategy for increasing CGFMU cover in MFI, and how are costs managed?
Answer: 60% of Q3 MFI disbursements covered under CGFMU (target: 70-75% in Q4). Guarantees reduce risk weights/credit costs despite fees. Govt-backed schemes support pricing flexibility and asset quality.

Question 9:
Has the MFI industry shifted to 3 lenders per borrower ahead of April 2025 rules, and what drove December improvement?
Answer: AU proactively adopted 3-lender limits. December saw higher collections (98.7% efficiency vs 98.5% in Q3) and disbursements. Recovery staffing doubled since June, aiding SMA/NPA resolution.

Question 10:
Can cost-to-income sustain below 58% post-FY25, and how is PCR balanced with ROA goals?
Answer: Cost-to-income to trend down via scale, digital labor, and branch productivity. PCR (~61%) reflects fresh NPAs; write-offs keep balance sheets clean. Target 70% PCR, with ROA prioritized over short-term coverage.