AUBANK - AU Small Finance Bank Limited Share Price

In the earnings call for the financial year ended March 31, 2025, AU Small Finance Bank's management provided an outlook reflecting cautious optimism amidst challenging macroeconomic conditions. Key highlights include:

1. Financial Performance: The bank achieved a profit after tax of INR 2,106 crores for FY '25, maintaining a return on assets (ROA) of 1.5%. This reflects strong operational metrics despite higher credit costs.

2. Growth Metrics: The deposit book grew by 27% year-on-year, reaching INR 124,000 crores, while the loan book expanded by 20% year-on-year to INR 115,000 crores, significantly outperforming banking sector averages of 10.1% and 10.8% for deposits and loans, respectively.

3. Credit Costs: Management anticipates credit costs in the range of 75 to 85 basis points for FY '26, with expectations of an improvement as credit costs in the unsecured segment are projected to decline.

4. Strategic Focus: There are plans to open 70 to 80 new branches in FY '26, primarily in top cities, along with optimizing existing asset centers for deposit mobilization. The focus remains on retail and MSME customers.

5. MFI Outlook: The management sees potential for scaling the MFI book cautiously, as regulatory guidelines provide stability. They expect to have 75-80% of the MFI portfolio covered under the CGFMU credit guarantee scheme, thereby mitigating downside risk.

6. Universal Banking License: The bank applied for a universal banking license and is hopeful for a timely evaluation by the RBI within the calendar year.

7. Long-term ROA Goals: Management remains confident in achieving an ROA of around 1.8% over the medium to long term, with strategic growth expected to outpace nominal GDP growth by 2 to 2.5 times.

Overall, the management highlighted a resilient approach to navigating the current environment while laying a foundation for future growth and stability amidst market uncertainties.

Question 1: We have already seen large and mid-sized banks rationalizing savings account rates post the 50 basis point rate cut. Are we not planning to cut rates in line with the system?

Answer: We have already cut our term deposit rates by 25 basis points and rationalized our savings account rates to a peak of 7%. However, our CASA remains below 30%, making it challenging to lower rates further without more industry-wide actions. Our approach is to build relationships and cross-sell rather than merely compete on rate cuts.

Question 2: How concerned are you about credit costs in Q1 and Q2, considering the elevated levels we've seen this year?

Answer: We expect elevated credit costs in the first half due to microfinance and credit card segments, but things should improve in the second half. The proactive provisions we've made will aid in normalizing credit costs, and we anticipate improved performances in MFI and credit cards as collections stabilize.

Question 3: What is the guidance for ROA for FY '27 despite the turbulent FY '25?

Answer: While FY '25 presented challenges, we are confident in our projection of around 1.8% ROA for FY '27. We are focused on reducing credit costs from 1.3% this year to approximately 0.85-0.9%, while leveraging growth in our other franchises to meet our targets.

Question 4: Can you share how the accelerated provisioning in the credit card space will affect future guidance?

Answer: The accelerated provisioning we've implemented means our normalized credit cost should trend towards 5-6% moving forward. Although we expect some elevated costs through H1, we are working to stabilize these numbers to reflect more accurately on our balance sheet this upcoming year.

Question 5: With regard to your universal bank license application, what is the timeline we can expect?

Answer: We anticipate receiving the decision on our universal bank license within this calendar year. Regular communication with the regulator has us hopeful for a timely evaluation of our application, which is crucial for our future growth strategy.

Question 6: Given the MFI sector's challenges, how comfortable are you with your MFI growth expectations?

Answer: We will maintain a conservative approach and restrict our MFI book growth to a maximum of 10% of our overall portfolio. While we're aiming to stabilize and cautiously grow in this area, it's essential we protect ourselves from any further downside risks, especially given recent regulatory guidelines.

Question 7: Could you elaborate on any significant effects of the recent guidelines on your credit books?

Answer: Our credit cost guidance remains intact despite the MFIN 2.0 guardrails impacting around 16% of our MFI portfolio. We anticipate maintaining around 3% credit cost provision to mitigate risks, ensuring a careful transition while supporting our customers through these regulatory adjustments.

Question 8: What do you expect for the overall market dynamics in the upcoming year?

Answer: The market seems to portray a mix of cautious optimism. While past euphoria has subsided, there are signs of recovery, particularly in sectors like real estate and hospitality. Our strategy focuses on seizing these opportunities while remaining grounded and pragmatic about growth expectations.