AUBANK - AU Small Finance Bank Limited Share Price

In the earnings conference call for Q1 FY26, AU Small Finance Bank management provided an optimistic yet cautious outlook. The bank expects the economic environment to improve in the second half of the year, bolstered by increased rural demand, urban revival, rising investment activities, and government-led capital expenditure.

Key forward-looking points included:

1. Loan and Deposit Growth: The management targets to maintain a growth rate of 2x to 2.5x of nominal GDP for their loan portfolio, with expectations that vehicle financing, commercial banking, and gold loans will see growth rates between 20-25%. They forecast mortgage growth to potentially reach 20% thereafter, up from the current 15-18% range.

2. Profitability Guidance: The bank estimates an ROA of 1.8% for FY27, emphasizing that they are prepared to adjust to credit cost pressures from the MFI sector, which is anticipated to stabilize. Despite challenges, they reaffirmed their commitment to enhancing asset quality.

3. Credit Cost Projections: The management increased the full-year credit cost expectation to approximately 1% of average total assets, translating to a slight increase from the previous guidance. This adjustment reflects their anticipation of elevated credit costs due to stress in the microfinance and certain mortgage sectors.

4. Margins Outlook: The management anticipates a bottoming out of the net interest margin (NIM) in Q2, expecting gradual improvements thereafter. They noted the NIM had decreased to 5.4% in Q1, largely due to declining asset yields.

5. Target for Unsecured Loans: The bank aims to stabilize and then grow their MFI book, targeting a year-end total of INR7,000 crores, signifying a 5% growth.

6. Branch Expansion: They plan to add 70-80 new deposit branches mainly in urban areas, continuing their strategy of driving granular retail deposit growth.

The management reassured stakeholders of their ability to navigate through the transitioning macro environment while maintaining a robust operational framework.

1. Question: "Sir, just two things from my side. One, on the overall profitability from a '26-'27 perspective. So, we have increased our credit card guidance. And when we look at NIM reduction in Q1, and also we are now finding that it will further go down in Q2 and then bottom out. So, how do you expect ROA settling in '26 and '27 considering pressure on NIM and higher credit costs in '26?"

Answer: We haven't provided specific ROA guidance for FY '26. However, we reiterate our expectation of achieving an ROA of 1.8% for FY '27.

2. Question: "Can you please elaborate further on the stress in Used SCV/HCV segment? Is it geographically specific or is it broadly due to weak macros?"

Answer: The used SCV & HCV book constitutes a small proportion of our assets. The trend started last year due to industry-wide pressures. We've taken corrective measures, and the rest of our book is performing well. It's not geographic-specific but confined to specific segments.

3. Question: "On this credit cost again, on the unsecured MFI, credit card, personal loan, I can understand. But, Sanjay sir, I mean, structurally, if I see for the last 6, 7, 8 years, your retail credit cost has always been 70 basis point or lower, barring the COVID year. What has changed?"

Answer: This business goes through cycles. Our credit cost is influenced by current economic trends and our larger scale. We anticipate some upward pressure on credit cost expectations in the range of 75-80 basis points owing to our larger presence and market dynamics.

4. Question: "So, will we want to rebound from this? And what is the medium-term strategy on the credit card now?"

Answer: The credit card business has experienced challenges, but we've made leadership changes and refined our strategy. We'll first aim for break-even, controlling losses, and ask for time from investors to see improvements by year-end.

5. Question: "Can the recovery be also as quick from the second half onwards or"¦?"

Answer: I believe we will see a partial recovery in our margins starting in Q3, though full recovery may take longer. The current pressures are expected to ease as economic conditions improve.

6. Question: "Regarding the Southern-based mortgages, could you provide clarity on slippages observed there?"

Answer: The Southern mortgage book represents about 15% of our overall portfolio, and the slippages are related to operational transitions. We have strengthened our collection infrastructure and expect improvements in results soon.

7. Question: "What proportion of the existing credit card book can eventually flow into NPA or have to be written off?"

Answer: The stress we're observing largely comes from a specific pool we've identified and limited. We've made significant changes, and we expect credit costs to start normalizing from here on, with improvements in our collection metrics.