Speaker #1: Ladies and gentlemen, good day and welcome to the AU Small Finance Bank Q2 FY27 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes.
Speaker #1: Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchstone phone. I now hand the conference over to Mr. Prince Devari, Head of Investor Relations and FIG AU Small Finance Bank.
Speaker #1: Thank you, and over to you, sir.
Speaker #2: Thank you, Rithika. And good afternoon, everyone, and welcome to AU Small Finance Bank's earnings call for the second quarter of financial year 26-27. We thank you all for joining the call this evening.
Speaker #2: On today's call, some management we have our founder MD and CEO, Mr. Sanjay Agrawal, our executive director, Mr. Vivek Tripati, our CFO, Mr. Gaurav Jan, and IRD.
Speaker #2: CFO, sir, we'll start today's call with 15 to 20 minutes' opening remarks, highlighting the bank's performance, positioning, and outlook. We'll follow the opening remarks with a 40 to 45 minutes of Q&A from participating investors and analysts.
Speaker #2: For the benefit of all participants, and so that we can take everyone's questions, we would humbly request everyone to keep the number of questions restricted to 2 per participant and join back in the queue in case we have further questions.
Speaker #2: For any data-keeping questions, you may kindly reach out to the IR team anytime post this call. With that, I now request Gaurav to share his opening remarks.
Speaker #2: Thank you, Prince. Good evening, everyone, and thank you for joining us for our Q2 FY27 earnings call. Q2 was our 38th quarter as a commercial bank, and over the past decade, we have navigated a dynamic operating environment while strengthening our balance sheet, building multiple growth engines, investing in technology and talent, and maintaining a sharp focus on risk management and governance.
Speaker #2: Q2 was another quarter where the bank demonstrated resilience and strong operating performance amidst a challenging macroeconomic backdrop. The operating environment in this quarter continued to be influenced by geopolitical risk and monetary policy tightening, with MPC raising policy rates by 25 basis points to 5.5% and shifting stance to calibrate tightening.
Speaker #2: While domestic activity and credit demand remained healthy, we remained watchful of the implications on liquidity, deposit pricing, loan yield, and demand. Now, let me walk you through the key highlights of our performance in Q2.
Speaker #2: Our deposits grew strongly by 29% year-on-year and 8% quarter-on-quarter, versus banking system growth of 18% year-on-year. This was despite not meaningfully participating in the strong STNR inflows in the banking system, due to our limited overseas footprint.
Speaker #2: We garnered around 230 million USD of STNR deposits on a gross basis in Q2. CASA deposits continued to see strong growth at 29% year-on-year and 11% quarter-on-quarter, with CASA ratio sequentially improving 70 basis points to 29.5% from 28.8% in Q1.
Speaker #2: Loan portfolio grew 25% year-on-year and 7% quarter-on-quarter, against banking sector credit growth of 19%. Secured assets, which remained the foundation of our lending franchise, grew by 26% year-on-year and 5% quarter-on-quarter.
Speaker #2: Unsecured businesses grew 23% year-on-year and 8% quarter-on-quarter, led by microfinance and personal loans. Disbursement for the quarter was up by 33% year-on-year, driven by broad-based growth across businesses.
Speaker #2: This balance sheet growth translated into healthy operating performance, net interest income increased by 32% year-on-year on the back of strong growth in loan portfolio and 33 basis points YOY expansion in margin.
Speaker #2: Sequentially, margin declined by 9 basis points to 5.8%, driven by higher share of investment total assets and seasonality. Sequential loan spreads remained broadly stable, with decline in loan yields of 9 bips largely being offset by 7 basis points decline in cost of funds.
Speaker #2: Whole fee income grew by 16% year-on-year, driven by healthy business volumes. Treasury profits were lower on a YOY basis, leading to muted total other income growth of 8% year-on-year.
Speaker #2: Operating expenses increased by 26% year-on-year, driven by growth in disbursement volumes and continued investments in distribution, brands, and technology. Operating leverage continues to play out on underlying basis, with cost to assets ratio excluding guarantee premium improving from 4.1% in Q1 to 3.9% this quarter.
Speaker #2: We expect cost to assets ratio to improve year-on-year on a full-year basis. Whole fee POP grew by 31% year-on-year to 1,480 crores, whereas provisions declined by 25% to 359 crores, largely led by normalization in unsecured businesses.
Speaker #2: Asset quality metrics remained stable during the quarter. Dispense ratio improved on a year-on-year basis to 2.6% versus 3.3% a year ago, supported by improvements in unsecured businesses.
Speaker #2: While slippages in the secured assets remained stable. GNPA ratio declined by 42 basis points year-on-year to 1.99%, and credit cost, including guarantee premium, declined by 45 basis points year-on-year to 0.8%.
Speaker #2: Profit after tax grew 53% year-on-year to 858 crores, compared to 561 crores in Q2 FY26. ROA for the quarter improved to 1.7% versus 1.4% in Q2 last year, and ROE improved to 16.1% versus 12.4% in Q2 last year.
Speaker #2: For the first half of FY27, profit after tax improved by 45% year-on-year to 1,654 crores, compared to 1,142 crores in H1 FY26. Similarly, ROA and ROE improved to 1.7% in 15.8%, respectively, compared to 1.4% in 12.9% for the same period last year.
Speaker #2: In terms of other strategic updates, we continue to invest in our people, distribution, branding, and technology to strengthen our foundation for the next phase of our growth.
Speaker #2: During the quarter, we added around 2,400 employees, largely in customer-facing roles, to support our increased distribution, with 45 new deposit branches and 100-plus asset centers added in Q2.
Speaker #2: We also strengthened our senior leadership team, with Mr. Anil Agarwal joining as senior executive group head to lead our commercial and institutional banking business.
Speaker #2: And Mr. Amol Padi formerly assumed the role of chief risk officer. We've also stepped up our brand investments across television, print, and digital media, with association with Con Banega Karorpathi being a prominent investment.
Speaker #2: This month, we also inaugurated our new corporate office in Mumbai, marking an important milestone in our journey. In the next few months, our entire senior leadership will be co-located in this office, bringing us even closer to the broader financial ecosystem.
Speaker #2: In terms of our credit rating, on 1 October, IKRA ratings upgraded our credit rating outlook to positive from stable. While reaffirming our long-term rating at AA.
Speaker #2: Coming to our technology and AI initiative, as announced last quarter, our tech strategy is organized across three pillars of run, build, and transform, with dedicated teams and leadership for each area.
Speaker #2: Run and build capabilities are enabling the bank to scale faster while serving customers more intelligently at lower cost and in uniformity. Transform pillar is focused on ensuring AI adoption at scale and moving AI from individual use cases to an enterprise operating model.
Speaker #2: Our deterministic agentic AI platform is a framework of responsible AI, human-in-the-loop governance, model explainability, full auditability, zero trust security with real-time risk monitoring. This enterprise-wide automation is driving straight-through processing and cross-sell.
Speaker #2: Our investments in data lakehouse, an analytics platform, have started to show some traction. For example, across these platforms, together with voice AI, enabled 5% of our total disbursements in Q2.
Speaker #2: Importantly, this automated customer coverage led to 50% operating cost savings led by voice AI disbursements. Additionally, the scorecard led underwriting models delivered 500 crore-plus of disbursements in unsecured loans during the quarter.
Speaker #2: Agentic AI LOS for gold loans is showing promise with over 2,500 loans disbursed till date, delivering faster turnaround times and superior customer service across 40 branches.
Speaker #2: Increasingly, the bank is focusing on scaling agentic AI journey to be mortgages and commercial loans, while redesigning five priority back office and control functions as AI-native workflows.
Speaker #2: Overall, our technology investments remain focused on delivering measurable business outcomes while creating a scalable foundation for sustainable growth and long-term depreciation. Now, let me provide some color on our key businesses, starting with deposits.
Speaker #2: Our liability franchise is classified under two broad verticals: branch banking and commercial and institutional banking. Branch banking forms around 60% of our total deposits and focuses on relationship-led customer acquisition and servicing.
Speaker #2: Commercial and institutional banking now comprises all other deposit verticals, including government banking, commercial and wholesale banking, FIG, and capital markets, where the mandate is to build a stronger current account-led deposit franchise through deeper solution-led engagement across transactional banking, cash management, forex, and institutional banking.
Speaker #2: In Q2, total deposits grew 29% year-on-year, supported by strong growth of 55% in car balances and 23% in star balances. On a daily average basis, car balances grew 60% year-on-year, whereas star balances were up 24% year-on-year.
Speaker #2: New Casa account acquisition during Q2 also remained strong, with 45% year-on-year growth in acquisition of premium accounts. During the quarter, bank also received savvy approvals for providing UPI sponsorship services under the ASBA framework for IPOs and public issues.
Speaker #2: This will strengthen our capital markets and transaction banking proposition and help bank position itself as banker to an issue for public market issuances. This strong deposit performance reflects several strategies coming together.
Speaker #2: Sharper segmentation, dedicated liability channels, wider distribution, stronger brand, and an improved customer population. These capabilities built over several years are now translating into stronger acquisition and more granular, broad-based growth.
Speaker #2: We are encouraged by the progress but remain focused on sustaining it with the right mix, pricing discipline, and quality of deposits. Moving on to our asset franchise.
Speaker #2: Retail secured assets comprising these mortgages and gold loans form 66% of our portfolio and grew 22% year-on-year and 5% quarter-on-quarter. Within retail, these book crossed the 50,000 crore milestone this quarter and grew 27% year-on-year and 6% quarter-on-quarter to reach 51,000 crores.
Speaker #2: Growth was driven by strong demand in the new vehicle segment, as well as increasing disbursement traction across newer geographies. Gold loan business grew 102% year-on-year and 4% quarter-on-quarter to 4,700 crores.
Speaker #2: Mortgage business comprising micro business loans in affordable housing grew by 12% year-on-year and 2% quarter-on-quarter, with growth largely being led by MBL/Lab business, where disbursements are up 17% year-on-year.
Speaker #2: As mentioned in the past, we are not looking to chase affordable housing loan growth, given our cost of funds and the competitive intensity in the segment.
Speaker #2: Moving on to commercial banking. This business grew 39% year-on-year and 8% quarter-on-quarter to 35,300 crores. With broad-based growth across sub-verticals. Transaction banking and forex income grew by 51% year-on-year, reflecting improving product punctuation and stronger customer engagement.
Speaker #2: With growth remaining robust, focus in commercial banking is to become progressively self-funded, with every lending supply chain and corporate banking relationship having a current account, CMS, or collections and payments proposition attached.
Speaker #2: Now, moving on to unsecured businesses. Our inclusive banking franchise, which primarily includes MFI, grew 23% year-on-year and 6% quarter-on-quarter. Collection efficiency was stable at 99.6% and 99% of the book is covered under the CDFMU guarantee scheme.
Speaker #2: Our digital unsecured portfolio also reported a strong growth of 23% year-on-year and 14% quarter-on-quarter. Personal loans grew by 81% year-on-year and 31% quarter-on-quarter off a low base, supported by analytics-led cross-sell and calibrated new-to-bank acquisition.
Speaker #2: The credit card book saw marginal growth with 1.5 lakh new cards issued in the quarter. To conclude, Q2 reflects continued progress across our deposit franchise, lending businesses, and profitability.
Speaker #2: As we look ahead, our focus remains on building the institution ahead of its scale by strengthening governance, leadership, and organizational capabilities, while simplifying processes and leveraging technology, data, and AI to improve customer experience and productivity.
Speaker #2: While we remain watchful of the operating environment, the investments we have made in our businesses—teams and distribution—provide us a strong foundation to pursue growth with discipline, granularity, and consistency.
Speaker #2: We remain confident in our ability to compound sustainability, deliver predictable performance, and create long-term value for all our stakeholders. I would like to thank our teams for their commitment and all our stakeholders for their continued trust in us.
Speaker #2: With that, I'll now hand it over to Prince for Q&A.
Speaker #1: Thank you, Gaurav. Rukija, we can now open the floor for question and answers.
Speaker #3: Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may please press star and 1 on the touchstone telephone.
Speaker #3: If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question.
Speaker #3: Ladies and gentlemen, we will wait for a moment while the question queue is simple. The first question is from the line of Akshay Chen from Autonomous.
Speaker #3: Please go ahead.
Speaker #4: Hi, sir, and thank you for the opportunity. I have two questions. First, on your margins, so I can see that your margins have declined by 9 basis points quarter-on-quarter.
Speaker #4: And you have attributed a higher investment as the reason behind it. So my question is, on this liquidities, you have seen a deposit growth of 8% QQ, and even if we adjust it for FCNR, it is strong at 6.7%.
Speaker #4: So what's driving this strong deposit growth? Is it some one-off, or is it because the larger banks have vacated the domestic deposit space for FCNRB?
Speaker #4: So what should be the sustainable deposit growth incrementally, and also the margins?
Speaker #1: Yeah. Hi, Akshay. Prince here. So thank you for the question. I think on our overall deposit, we have been commenting for some time. That as a bank, we have been investing heavily, both in our distribution as well as technology and getting processes right, getting make it easier for the customer to onboard themselves to bank with us.
Speaker #1: And what you are seeing is net-net a result of that, right? I don't think there is any one-off there. There could definitely be some transactional current account flows which came through last quarter, but we are I would not say it's a one-off.
Speaker #1: It's something that we have been working upon as a bank, and we have started to see some bit of result of that. And that's why you see the KASA ratio in the quarter going up by almost 70 basis points.
Speaker #1: On a quarter-on-quarter basis. So and I think if you recollect, our public guidance has always been that our deposits will continue to grow faster than or in line with our loan growth.
Speaker #1: And on a loan growth, given that this quarter the loan growth and because loan growth didn't have any FCNR component. So loan growth has grown at about 25% on a annual basis.
Speaker #1: And deposits have just followed that. So there's nothing specific to call out there, I would say. It's more the granular work that the team is doing and that puts us a lot more confidence going into this next cycle.
Speaker #4: Good. So what should be the sustainable deposit growth? But should we assume the current trend rate of, say, 26, 27% is sustainable, or should it cool down a bit incrementally?
Speaker #4: And even on the KASA front?
Speaker #1: Yeah. Yeah, Akshay. Sandhya Gaurav Desai. So no, I think the whole endurance of organization is just to look for a sustainable deposit growth, right?
Speaker #1: And you've already commented that we want to relate it with the overall nominal GDP growth of the country. And there, if the country is growing this year in the range of 10%, then we're expecting around 25% plus.
Speaker #1: So this half-year, year-on-year, 29% growth can be a little bit more than what we expected, but I think the whole architecture of building up deposit franchise has been really clearly laid down in the organization, right?
Speaker #1: So we have a retail brand-taking franchise. We have a commercial banking franchise, common banking franchise. So overall, we believe that for the last 9 years now, 38 quarters, we really have worked every day on our deposit franchise, and now it's a time when it's really paying in for us.
Speaker #2: Yeah. And also, if I can add, Akshay, if you see the average balances, I think we have given the daily average balance also for current account.
Speaker #2: It's daily account. And that also reflects, I think, Gaurav covered it in his speech. On a YOY basis, you're seeing both current account growing at about 60% on an average basis, and savings accounts also growing 24%, right?
Speaker #2: So that also tells you that this is more transactional money rather than anyone else.
Speaker #1: So our target is to grow in the range of 25% year-on-year. So but it should depend on the debt market and the overall condition.
Speaker #1: So what we are very happy to see our growth irrespective of our not doing so well in our FCNR deposits.
Speaker #4: Understood, sir. And second question is on asset quality. So this quarter has been pretty robust on asset quality. But what would be the outlook on asset quality?
Speaker #4: Given the El Niño and the uncertain macro, plus many of your peers have warned of the impact of drought, especially in certain regions in central India.
Speaker #4: So how should we expect asset quality to behave incrementally? And any change to credit cost guidance?
Speaker #1: Yeah. Yeah. Yeah, Akshay. So of course, there are not many vulnerabilities which we are all going through. But the silver lining is this that our six-month credit cost is around 73 bits or 74 bits.
Speaker #1: We have given a guidance of close to 90 bits. So we have enough room for any kind of vulnerabilities or one-off. But largely, some of the districts or states might be facing challenges to drought or high oil prices and whatever, right?
Speaker #1: But the data has not shown any kind of stress till now. But yes, from the cost, let's see how quarter three behaves. Because whatever will be there will come in the quarter three.
Speaker #1: I don't expect any surprises in quarter four, to be honest. So but we're going to add on something.
Speaker #2: Yeah. So largely, what we anticipate, right? So so far, until September, everything has been in line. And what we anticipate that we would be within our guided range.
Speaker #2: So we don't anticipate that we will be reaching in. It's a so in terms of product also, I would say one of the most vulnerable products has a very wide coverage now, 99% of that book is covered under CGFU.
Speaker #2: So we don't worry that much.
Speaker #4: So is it safe to assume that your SMA levels as well as the collection efficiency are still pretty robust? And you are yet to see any deterioration over there?
Speaker #1: Absolutely. Absolutely, yes.
Speaker #4: Thank you, sir. Those are my questions.
Speaker #2: Thanks, Akshay. Thank you.
Speaker #3: Thank you. The next question is from the line of Jayan Kharodi from Axis Capital. Please go ahead.
Speaker #4: Sure. Go ahead.
Speaker #3: I'm sorry to interrupt you, Mr. Jayan. We are unable to hear you.
Speaker #4: Hello. Am I audible now?
Speaker #3: Yes.
Speaker #4: Hello. Yeah. Congrats for the good set of numbers. First question is on slippages. If you could help us understand which segments have seen in-jump Q2 versus Q1 in terms of slippages, that is first question.
Speaker #4: I'll come back with my second.
Speaker #2: So Jayan, both Q1 and Q2 sequentially is not comparable. Typically, it's not Apple-to-Apple comparison for to have a right comparison, you have to compare it with the last year Q2, because there is tractor is the one product where you have a billing cycle twice in a year, right?
Speaker #2: So this quarter, you had a tractor billing, and tractor billing will have a little bit of impact on your overall slippages, right? So the right, it has a seasonality because it's playing with the crop cycles.
Speaker #2: So in I would say the if you look at the improvement area from last couple of quarters, that has largely been from the unsecured side.
Speaker #2: Our credit card and microfinance franchise has stabilized and is absolutely in the shape. And on the secured retail asset or commercial asset, there has never been a challenge for us, right?
Speaker #2: So that's always has been a reinforced. So we don't see any sort of a reason to ascertain that any change in the slippages. It's more of a seasonal and more of a tractor billing.
Speaker #1: Yes.
Speaker #4: Understood. So you can continue if you want. I can go on the second one.
Speaker #2: No, no. Go ahead, Jayan. Next question.
Speaker #4: Okay. Second was on the insurance fee incoming impact, right? While there is some ROA impact to that tune, we have been guiding for this 1.8% ROA outlook consistently.
Speaker #4: Given that this could be maybe 7, 8 basis points of impact, what levers do you have to ensure that our ROA, ROE profile remains stable going ahead?
Speaker #4: And why I'm asking this is as I can see your shoring up deposits or liabilities as you scale up, that is going to weigh on your NIMS, right?
Speaker #4: And probably right strategy to invest on the liability side from the medium-term perspective. But then how do you manage the ROA profile with this surplus liquidity on the deposit side continuing for the next two, three years?
Speaker #4: And then that insurance hit coming.
Speaker #2: Yeah. So look, when you speak about the ROA outlook for in the sort of, say, medium term, right, so really, there will be some headwind from this insurance fee income consultation paper, right?
Speaker #2: So we remain it remains to be seen what is the final shape in which this is ultimately passed. But irrespective of that, there will be some impact, right?
Speaker #2: But what I want to add is there are other line items within the other income line which are growing on a secular basis. So we have Forex business which we started one couple of years back.
Speaker #2: That is gaining quarter on quarter. We also have credit card issuance is bouncing back. So that is also eating sort of my other income fee pool.
Speaker #2: We're also growing our trade finance business, right? So there are other fee pools which will help offset some of the headwinds from the insurance side of things, right?
Speaker #2: In terms of other components of the ROA tree, we have been discussing extensively the operating efficiency as a key driver on a multi-year basis, right?
Speaker #2: When you look at our cost-to-assets ratio of about 4%, that will that compares with other mid-size banks who are operating between, say, 2.5 to 3.5.
Speaker #2: So I see confident that on a multi-year basis, we should be looking for sequential improvements on this, despite sort of continuing to invest in our franchise, right?
Speaker #2: Then on credit cost, we have said that long-term, you should expect 90 to 100 basis points of credit cost on a few of the cycle basis.
Speaker #2: So that will depend on how each year is playing out. So that's those are some of the key drivers. And the final one, again, this is I don't want to comment on quarter on quarter.
Speaker #2: But we have deposit franchise which is gaining momentum and traction with each passing quarter, right? It prints spoke about and I mentioned in my opening remarks how we are adding propositions which are for differentiated segments, how we are investing in our distribution, in our technology, and in our brand, right?
Speaker #2: So my deposit franchise will improve which should help me lower the cost of funds differential versus other peer mid-size banks over a medium-term outlook.
Speaker #2: So I think those are some of the things which will help, right? These are some of the known things which we think we should have.
Speaker #2: And then there's always there are stuff which comes out of the woodwork, both on the negative side and positive side. So we remain hopeful that there are other stuff like the UPI, NDR, income line, etc., which will start to come into play.
Speaker #2: So multiple things to offset this.
Speaker #3: Sorry to interrupt. Maybe request, Mr. Jayan, to please rejoin the queue. We have other participants waiting for turn. Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants, we will request you to please limit your question to two per participant.
Speaker #3: The next question is from the line of Kanal Shah from Siddhi Group. Please go ahead.
Speaker #5: Yeah. Hi. Thanks for taking the question. So particularly on the deposit side from two contexts. One is we have grown at a pace faster at almost 28, 29 odd percent.
Speaker #5: And other banks are flushed with liquidity from FCNR. So what would be our deposit rate strategy? Would we continue with this 80, 90 basis points of premium on the term deposit side?
Speaker #5: Or given that banks, other banks would not be very aggressive, would we look at tweaking the deposit rate? What would be our deposit rate strategy in the current environment?
Speaker #2: Hi, Kanal. So 80, 90 or maybe 100 basis premium to other banks, we want to be on that strategy only because we haven't seen any rates coming down because of FCNR deposits.
Speaker #2: And it was largely on the, I would say, wholesale deposits where some cut happened. And we also calibrated ourselves. And that is why our cost of money for quarter two has come down, right?
Speaker #2: But in a larger sense, we need to build our deposit franchise and we need to build with some kind of price. And that we really want to be like this till we get a new platform and we settle on the new platform.
Speaker #2: So I think deposit franchise remains our top priority. And we will not play around with market-driven forces or events. Rather, we want to be on our own path and create more and more end customer and treat them holistically or serve them holistically so that in the long run, our franchise will get more stable and sustainable.
Speaker #5: Okay. So in rising rate, if other banks don't react, in terms of increasing the rates, we might still react looking at maybe DR growth profile and maybe our strategy which is there.
Speaker #5: We will not be more market-determined.
Speaker #2: Oh, no. I won't say I'm not saying this. I'm just saying this because we've had our strategy which is always based on some market data and all those things.
Speaker #2: But it's not driven by a lot many optics numbers, right? Whether we are pricing our 100 basis points more or we are pricing with some other it's our own strategy where we want to raise our money.
Speaker #2: So that will continue. If money becomes expensive, we need to build our deposit franchise around that. But our deposit franchise now becoming more and more I would say visible.
Speaker #2: It's gaining the traction. We are building our franchise more in the sense of that people are trusting us and knowing us more and more.
Speaker #2: So the cost of acquisition and the effort of effort in acquisition is now going down. So that's the way I'm explaining that what we have done around deposit franchise is one of the examples where how we can calibrate both, the cost and the growth.
Speaker #2: So it's a balance of both, right? So let's not read too much. And I would say we go along with the requirement of the business.
Speaker #5: Got it. And secondly, on optics to asset, so this quarter, again, we saw quite a significant jump on optics side, 7% quarter on quarter.
Speaker #5: And when we look at overhead cost, that has gone up by almost like 11 odd percent quarter on quarter, 35% year on year. So currently, it's still in line with the overall AUM growth.
Speaker #5: And we kept talking about the optics efficiency. So when should we actually start seeing this efficiency? I understand we have added branches, added employees over the past couple of quarters.
Speaker #5: But when ideally this operating efficiency would start to play?
Speaker #2: So look, there are two impacts. When you look at the 25% year-on-year increase in cost, right, so there is an underlying cost which is supporting the existing business.
Speaker #2: And then there is investment which is going for improving the platform, be it through technology, distribution, or branding. So the 25% is a net result of that, right?
Speaker #2: But if you look at on a cost-income ratio or on a cost-to-assets ratio, we are either stable or improving on that. So on an ROA3 basis, I think we improved on a YOI basis when you look at Q2 numbers.
Speaker #5: Okay. Got it. Okay. Yeah. Thanks. Thanks for answering the questions here.
Speaker #3: Thank you. Next question is from the line of Nitin Agarwal from Muthilal Oswal. Please go ahead.
Speaker #4: Yeah. Hi. Thanks for the opportunity and congrats on good results. I have two questions. One is on the gold loan growth. We have been earlier reporting pretty strong growth, 100% plus, but this quarter is a little outlier in that strong growth context.
Speaker #4: So anything to read into this from this quarterly growth perspective? And second is, again, going back on the margin in general, there has been a concern about the fixed-rate nature of the bank and how the rate cycle is playing out.
Speaker #4: So what levers do we see to maintain margins and is there any risk that we are looking at that can play out on the margins if the competition for deposit tightens going further?
Speaker #4: And because the book will take some time to reprice, so how is the management looking at that?
Speaker #2: Nitin, and maybe first comment on margins, and then I'll send you to comment on gold loans. So margins, I think if you see our margins this quarter, the loan spreads have been similar, right?
Speaker #2: If you compare quarter on quarter basis, then the while the cost of funds have gone down by about seven basis points, we have also seen some decline in the yield because of the mixed change, right?
Speaker #2: That's what we had articulated last time as well. So I think the larger part of the NIM decline has been coming from the higher liquidity that we have maintained or basically the higher investment book that we have run as a percentage of total assets.
Speaker #2: And then there has always been that discount impact which keeps altering between quarters. So this quarter, I think there was an extra discount. So that had impacted three, four basis points, right?
Speaker #2: But if I go forward and if I look forward, then I think a couple of questions a couple of key components to the NIM.
Speaker #2: One is obviously on the cost of funds. On cost of funds, as we articulated, this quarter, the cost of funds benefited from transactional current account balances, which had gone up significantly.
Speaker #2: Right? As you somebody else said in the call earlier, that the system liquidity is drying up from the FCNR. There was a lot of system liquidity that also has but I think that has started to dry up.
Speaker #2: And the rates have started to go up, right? Especially in the short term, you can clearly see rates going up. So this probably will put capping in terms of further improvement in our cost of funds, right?
Speaker #2: So going forward, it'll be more a function of liquidity and deposit competition, which will determine the trajectory of cost of funds. I think Kunal's earlier question that we fed our deposit cost to the midsize banks, right?
Speaker #2: So if they react we will necessarily be forced to react given the platform at disadvantage that we currently have. Right? And some of the yield of advances is concerned.
Speaker #2: I think that was your question, that 30% of our book is floating rate, and 70% is fixed rate. So this 30% floating rate book, the recent repo hike that has happened of 25 basis points, that get transmitted over the next three to four months.
Speaker #2: Right? Typically takes about three to four months or one full quarter. So full impact will be visible next quarter. But it will start happening from this month onwards, right?
Speaker #2: In case any future rate hikes happen, then that will further go on to support the yield on this 30% of the book, right? As far as the 70% of the book is concerned, which is fixed rate, I think there we'll have to just go with the market.
Speaker #2: And if there could be any pickup in the disbursement yields in the market, then I think that should start reflecting at our end as well.
Speaker #2: We'll follow that company's discretion. Right? And otherwise, it's a function of what the asset mix is going to be. And as you know, that this time, I think unsecured book is also available to us, which was not really there last time.
Speaker #2: And it has started to come off the cycle and started to do well, right? So if you ask me a very point-blank question that are we better prepared compared to the last interest rate cycle?
Speaker #2: The answer is yes. Right? And why I say that? I say that because of two or three reasons. And I think we talked about some of them in the call.
Speaker #2: One, the overall the floating rate book, which is now 30%, provides some cushion. Right? Second, because the overall if you look at the deposit rate tenure itself, what we have done is we had elongated our deposit rate retail deposit tenure, the peak rate from 18 months to 36 months.
Speaker #2: So that should also help. But the biggest point that I want to highlight, or the second biggest point, is the interest rates in the system haven't gone down to the extent the repo rate cut has happened.
Speaker #2: If you look at the last three, four terms, since December quarter last year, even though the RBI cut the repo rate by 125 basis points, the deposit rates haven't really reacted that strongly, right?
Speaker #2: And we do believe that when the rates start to go up, probably that some of that is already baked into the market price. And the last point, I think as a deposit franchise, we are in a much better position than we were in 2022 when the last interest rate cycle kicked in.
Speaker #2: Right? The franchise is much bigger investing in our branches. We are a pan-India franchise. And obviously, there could be a tailwind from the platform transition as well.
Speaker #2: Right? So I would say all in all, we do think that we are in a much better position to traverse this NIM cycle as compared to where we were last time.
Speaker #4: You got that. Thanks, for such a detailed explanation. And the second question was on the gold loans.
Speaker #2: Yeah. So hi, Nitin. You're late here. See, gold loan, if I have to just look at the year-on-year growth, it is pretty strong, right?
Speaker #2: It's more than 100%. Though we have starting from a very small base, but it remains a highly attractive franchise for us. And there is a whole lot of distributions available to us to grow this book.
Speaker #2: So whatever moderation we are seeing in the near term, it's just because it's a reversal of gold loan prices, which has impacted two things.
Speaker #2: One, the renewal. The second, the greedy portfolio from the industry. Right? I don't think that we have to read too much into it. There is a whole lot of distribution which is available for us.
Speaker #2: And our focus remains on this product where we see that we have a strong headroom for growth available to us to grow this book.
Speaker #2: So we'll continue to keep on investing on the distribution of this product.
Speaker #4: Right. And Mavic, can you possible to share any color around the LTVs in this product?
Speaker #2: So LTVs remains a range bound, right? And there is a proper mechanism. There is a breach happens of the margin call. So it's a well-defined, right?
Speaker #2: At a portfolio level, it's about 75%. And that remains which was there in the last quarter, which is there in this quarter. So there's hardly any difference, right?
Speaker #2: But what it does, the metal prices are not increasing. The opportunity for you to renew that customer or take the top-of-loan or do a BT from somewhere else, reduces.
Speaker #2: And hence, you're seeing industry-wide little slowdown, right?
Speaker #4: You got that. You got that. Thank you so much.
Speaker #2: Thanks. Thanks, Nitin.
Speaker #3: Thank you. The next question is from the lion of Ashley Shonji from Kotak Securities. Please go ahead.
Speaker #4: Thank you. Good evening. A few questions from my side. I'll just list them out there. Firstly, under CASA deposits, the bank has seen a very commendable acceleration in the past few quarters.
Speaker #2: Sorry, we can't see you properly. Can you just pick up the handset?
Speaker #4: Okay. I'm just listing out a few questions. Firstly, on the CASA deposits.
Speaker #3: Oh, sorry. To interrupt you, Akhilesh, but your voice is breaking in between.
Speaker #4: Okay.
Speaker #3: Are you connected on a handset mode?
Speaker #4: Yes, I'm on a handset right now. Is this better?
Speaker #2: This is better. Hello? Can't hear you.
Speaker #3: We would request you, Akhilesh, to please come in a proper reception area. And if you we would request you to please rejoin the queue because we are unable to hear you, sir.
Speaker #4: Sure. Okay. We'll do that.
Speaker #3: Thank you. In the meanwhile, we'll move to the next participant, Mr. Piran Engineer from CLSA. Please go ahead with your question.
Speaker #4: Yeah. Hi, team. Thanks for taking my questions and congrats on the portal. Just going back to one of the earlier participant's questions, so I understand slippage can be seasonal and you should not compare Q1 with Q2.
Speaker #4: But if I take this industry scope Q and I compare it with before MSI crisis, so let's say 2023 or 2022, it is still slightly higher.
Speaker #4: Now, again, is there something to read into it? Is it just transitory? How do we read it? Especially in an environment where all banks are reporting very close slippage numbers, how do we read this?
Speaker #2: I think we should comparison of 2022 when you were coming out of the very different cycle where most of the NPAs were early recognized and the acceleration of the asset quality happened.
Speaker #2: This is very different. Second, the composition of the book, right? We had a very small some of the book like Tractor, which I said that it has a it has only two cycles of representation, right?
Speaker #2: This is a six-monthly billing, right? So if you have a big billing in June, that would slippages would happen in September, right? So that book today is about 12, 12, 13 percent of my deals book, right?
Speaker #2: So that will have cyclic impact, right? Whenever there is a representation, so June and December both are the cycle when the billing happens. And so subsequently, in September and as well as March, you will have a tractor slippage, right?
Speaker #2: So there is no comparison. So I think just to conclude on this topic because we have already answered Mr. Piran? Yes. Hi. Hi. Hi, Piran.
Speaker #2: Sorry. I missed your name. So I would think, Piran, we have already answered the slippages question, I think, on a couple of occasions. I'll just say one last point on this, and then we'll probably not be able to take any further questions on this topic.
Speaker #2: Very simplistically, I think there's nothing to read there. Our asset composition has changed in the last three or four years, right? So numbers are not really comparable.
Speaker #2: We should compare what Vivek said year-on-year. That's the more relatable trend because there is always an element of seasonality into our portfolio. We don't and again, it's unfair to compare with the bank.
Speaker #2: Banks lend to a completely different segment in a completely different yield curve. We are segment is entirely more self-employed. And earn-and-pay segment, right? So I would say when we looked at our internal data, when we look at year-on-year comparison, adjusting for seasonality, there's nothing underlying there which points out any early warning signals.
Speaker #2: I hope that's it.
Speaker #4: Okay. Yeah. No, that does. Just in your initial comments also, you mentioned that you're not chasing affordable housing finance due to higher cost of funds.
Speaker #4: But just wanted your thoughts on two things. One is, yes, your cost of funds are not comparable to a regular big bank.
Speaker #2: But then competition as well. We said competition as well.
Speaker #4: But how do you think about the total cross-sell potential of that customer and let's call it the food for lifetime value? It's a large market.
Speaker #4: Affordable housing started one of the largest NBFCs a decade back.
Speaker #2: No, no, no. I think you're right. Our communication would have been taken wrongly. What we said that on an isolation basis, we don't want to build more housing books and that to an affordable housing book.
Speaker #2: But if our existing customer who's having a good bank balance with us or relationship with us, we want to provide them a mortgage loan on the current market rates or maybe lower than that.
Speaker #2: And we already started that. But that cross-sell of the book won't give you a large mortgage book because we are not attempting on a very secular basis.
Speaker #2: So that was our commentary. It was not based upon our existing customer.
Speaker #4: Got it. Got it. Okay. And just one last question, if I may.
Speaker #3: Sorry to interrupt, Mr. Engineer. We are unable to hear you, sir.
Speaker #4: Okay. Sorry. My question was the commercial banking book. What's the mix between fixed and floating rate loans?
Speaker #2: Commercial banking is not a fixed and floating rate.
Speaker #4: Sorry. Could you repeat that?
Speaker #2: Entire book is floating.
Speaker #4: Okay. Got it. Got it. Yeah. Okay. That's it from my end. Thanks, and all the best.
Speaker #3: Thank you. The next question is from the line of Rajiv Mehta from ES Securities. Please go ahead.
Speaker #4: Yeah. Hi. Good evening. Thank you for giving the opportunity. So my question is on the mortgages piece and mortgages book, which is a large book, but the growth there has been slow for a while.
Speaker #4: So how can the growth revise there? And second is on the wheels portfolio or the wheel segment, which is your auto loans and commercial vehicle loans.
Speaker #4: How has the festive period gone? In terms of demand, and what can be the growth outlook? Are you seeing that the growth can actually come up on a larger base?
Speaker #4: Hence, if these two segments don't really grow well, can we then sustain this 25, 26 percent growth momentum in the coming quarter?
Speaker #2: Okay. So wheel business absolutely in good shape and performing share. They're growing by 27, 28 percent year-on-year. And the festive demand is strong there.
Speaker #2: And it will only go up from here because there's a Diwali coming up next month and all those stuff. So I don't think there is a challenge for us to grow in that sense.
Speaker #2: And we don't want to grow above our level also. And we have a large bucket from two-wheeler to entire commercial or a personal range.
Speaker #2: So that is largely sorted. And we want to become one of the most prime vendor in this segment, right? And as far as mortgage is concerned, it has three part of it.
Speaker #2: One is more MBL object lab. So not the older market of us is growing in the north of 15 percent. We don't want to grow our housing book much, but they're also the growth rate is around 10, 12 percent.
Speaker #2: But in southern markets where we acquired business through the FinCare Bank, we really want to again rebuild in that market with the strategy of AU as a one unit.
Speaker #2: So it may take some time in southern market because we want to be we want to build with our own culture and values and our own strategy.
Speaker #2: So but we are really focusing on our mortgage business. And we are hopeful that the distribution we have across country we should touch in the range of 20 percent by next year.
Speaker #2: So and we are pretty fine with that range because other book, which is commercial banking or unsecured piece, is growing more than 25 percent.
Speaker #2: So overall, we are targeting again in the range of 2.5 times to nominal GDP rate side. So we have enough bucket available us with us.
Speaker #2: So and we can grow any of them to maintain that growth rate.
Speaker #4: Got that. And any comments on collection efficiencies in October in spaces like microfinance, small business loans, and tractor finance? And one more related question is on the PCR.
Speaker #4: We have seen a PCR decline. So when you guide for a credit cost of say 90 basis point, for the whole year, are you also looking at restoring the PCR a bit?
Speaker #4: Raising PCR in the coming quarter?
Speaker #2: Yeah. So PCR, we don't actually target PCR. It's all about our policy on the provisioning, right? Which we have become actually more stringent if you look at the end of Q1, we have given the disclosures as well that we had become more stringent on as well as provisioning as well as on the write-off.
Speaker #2: And it is not function of targeted PCR. The PCR had come down because we had written off some of the book with the alignment because there was an unsecured book.
Speaker #2: There was a two-wheeler book. Within the unsecured piece, there were three four books which had a little differentiated write-off policy. So we aligned everything all the books in one line.
Speaker #2: And you had more of that. Second, as your security guaranteed book is increasing, which is about 70 percent of the total overall book, it would look lower.
Speaker #2: But when you add back the guaranteed portion, it would be actually much higher. It would be about 7, 6, 8 percent. Yeah. And in terms of giving the colors of October, that's something which is in the middle of month won't be possible.
Speaker #2: As we said that till 30th September, we had no impact but in a certain sense to watch out for the whole country, we are also watching out.
Speaker #2: And there is nothing to read in between that.
Speaker #4: Got it. Thank you. Best of luck.
Speaker #3: Thank you. The next question is on the line of Ashley Sonjay from Kotak Securities. Please go ahead.
Speaker #5: Hey. Hi, team. Good evening. Can you hear me now?
Speaker #2: Yes.
Speaker #3: Yes, you are audible, sir.
Speaker #5: Okay. Sir, just a few questions from my side. I list them out. Firstly, on the CAFA deposits, the growth has been quite commendable in the past few quarters.
Speaker #5: It would be great if you can share the cost of star deposits in terms of deposits for this quarter. I believe the last quarter's disclosure was 505 in star and 725 in TD.
Speaker #5: That is one. Secondly, if you can talk about the trend in slippages in the mortgages business specifically on a QOQ and YY basis. Third one, general banking fees have declined YY in this quarter.
Speaker #5: Can you explain the reason there and also remind us if there is any seasonality in the booking of any of the fees inside this item?
Speaker #5: And lastly, CGSMU, if you can call out the rupee cost in this quarter and the previous quarter.
Speaker #2: Sorry. What was the last one, Ashley?
Speaker #5: CGSMU premium cost.
Speaker #2: Yeah. So see, some of these are very descriptive questions. I don't think we disclose some of these data. Right? So I would suggest whatever is already publicly disclosed, we will keep our answers to that.
Speaker #2: Savings cost, we don't disclose it, but I think you'll ask this question last quarter as well. The rate continues to be similar to what we had told you last quarter.
Speaker #2: Right? So there's no material change there. Right? Then as far as the mortgage book is concerned, yeah. So mortgage, I'll not quantify, but give you an directional answer that it's better off quarter on quarter, it's better off year on year.
Speaker #2: And on the fee side, I think there has been it's just seasonality. There's nothing else to read into it.
Speaker #5: Okay. Can you just elaborate a bit more? Because on a YY basis, I'm wondering what is the seasonality here?
Speaker #2: No, no. So I think last year, same quarter, we probably had some more income on insurance. On a full-year basis, our view is that that should get adjusted.
Speaker #2: There's nothing more there. I think if you see all the other lines, in terms of processing fees, that's up 17 percent. If you look at the credit card fee, if you look at the transaction fee, both are up more than 50 percent.
Speaker #2: Right? So I think it's only the banking fee where largely the cross-sell income goes. And there, again, our view was that this quarter was a bit slow.
Speaker #2: And we remain on track to deliver on a full-year basis. So nothing much to read there.
Speaker #5: Understood. Perfect. Thank you. Those are all the questions.
Speaker #2: Yeah. Thanks so much, Ashley.
Speaker #3: Thank you. Ladies and gentlemen, as that was the last question for today, I now hand the conference over to Mr. Prince Devari for closing comments.
Speaker #2: Thank you, Rituja. And thank you, everyone, for joining the call today and for your questions and for all your support. In case you have any further questions, kindly reach out to the IR team.
Speaker #2: This is Prince signing off on behalf of EU management. And thank you so much. Look forward to joining you next quarter.
Speaker #3: Thank you very much. Ladies and gentlemen, on behalf of management of AU Small Finance Bank, we conclude this conference. Thank you all for joining us, and you may now disconnect your lines.
