← Throughline · holding view Deep analysis ↗ Q4 FY25
AUBANK AU Small Finance Bank Ltd · Private bank Q4 FY25 · concall
Pattern: nim range fy26 5

MFI stress and credit-card correction narratives fully resolved by Q4FY26.

3 weak · 10 clean — pushback across 3 of 13 Q&A turns

Focused evidence 3 of 13

Renish · ICICI Bankweak

Congrats on a good set of numbers in this challenging time. So sir, my first question is actually on the NIM, right? So post the 50 basis point of rate cut, we have already seen large and mid-sized bank sort of rationalizing the SA rates. So are we not planning to cut rates in line with the system?

So, Renish, we already have cut on our term deposit rates by 25 bps. We already have rationalized our saving buckets, you know saving account buckets. So we are not giving now -- the peak rate around Savings is now 7% instead of 7.25%. To further go down, we'll require some more actions from some of our competitors because our CASA is below 30% and we are not enjoying a space of around 40%, 45% in that book. So it's not easy for us to cut rate below 7% as of now. But let's see how the entire industry plays their whole game in this year, and then we will take the action around it. [Follow-up from Renish on NIM range 5.5%-6% in FY26]: So if you ask me as of now, the next year, the lever is on the credit cost. The challenge is on NIM. So, as of now, it's so difficult to predict whether we'll go down by 10 bps or 20 bps or 30 bps, but there will be a challenge on the NIM. [Prince Tiwari adds detail on NIM components]: We don't want to put a number out there because a lot of factors are -- as I said, it will also depend on how quickly the rate gets transmitted through the system on the deposits. [Sanjay clarifies long-term credit cost target]: 75 to 85 basis points is on the total average assets. And as we said, that's a long-term average. For next financial year, we are expecting that we might be on the higher end of that curve.

Nitin Aggarwal · Motilal Oswal Financial Services Limitedweak

Hi, good evening everyone. I have a few questions. Firstly, on the ROA guidance that we have for FY '27. So Sanjay ji, you gave this guidance like last year and we had a very turbulent FY '25 and there will be some impact of new guardrail in 1H as you mentioned. So how comfortable do you feel to make this guidance? Do you foresee any risk to this? Or do you think that the risks are evenly poised, so what's your assessment on that?

Nitin that is good question. So last financial year, which is now '24-'25, we struggled with both credit cost and the NIM. Still, I would say our performance is as per the guidance. We have accelerated our provisions by ~10 bps, which was much required. So of course, the landing at 1.53 instead of 1.6%, so we really performed last year also as per the guidance, in my opinion. Second, this financial year, I believe credit cost will be more in control. Rather, we can have a challenge on NIM, right. But I think you know that interest rate factors are now coming down, we are well prepared in terms of anticipating the Indian economy and its effects. So next year, which is '26-'27, I am pretty sure that what we have guided you in a year back, should get materialised. But I don't want to, again, hold myself to around that guidance. It's our endeavor, right? But these are things because if you see our ROA sheet, we're around 5.7%, 5.8% this year too. We are around -- other income is around 1.8%, 1.9%. It will go further up because we are strengthening our cross-salability through other product lines. Our cost to income is around 4.25%. It might have -- might stable here, right, might not go down for a couple of years. But I'm seeing huge, again, I would say, reduction in my credit cost from 1.3 to 0.85- 0.9 next year, further going down 0.75, maybe in '26-'27. So I then put all together, if you put all the nets in place, we are above 1.8%, right? [LCR follow-up]: New guideline, I think we haven't done our working, but it is close to 120. [Yogesh Jain]: these guidelines are better than draft guidelines. And I think we are just evaluating but it should be neutral to positive impact on us.

Rahul Jain · Goldman Sachsweak

Sanjay Ji and team, I think, congratulations, it's been a tough year for you all. And despite that, your numbers are decent. I just had a few questions. Maybe just to start with the credit cards, the loan loss provision guidance, which you said this is still some residual pain that you'll clean up in the first half. But in this quarter, you already made 150% sorry, INR150 crores of provisions. So how much more is required -- I mean if you can just share some more color on SMA-1, SMA-2 book in the credit card space.

Yes. So Rahul, like this year, due to the accelerated provision on credit card book, it is around 12.5 kind of credit cost. And I expect a credit cost of credit card on a on a very normalized basis should be in the range of 5% to 6%. Next year, this financial year, '26 -'25-'26, I expect my credit cost on credit card should be around in the range of 6% to 7%. So the idea is to bring my credit cost assumption on a book level on a normalized basis from this year onwards. So that's why we have done this accelerated provision so that the normalized credit cost should be there on our balance sheet from this year onwards. So I don't think that any specific provision is acquired from here onwards to really arrest our any additional credit card costs. [Follow-up on slippage peak]: Again, Rahul, honestly, I love to say that, and we'd all want to. But as we said, it's a Q4 right now, and there is definitely always a year ending phenomena that plays out. [Margin follow-up Prince]: And also, as I said in the first question, primarily, there was an impact of higher cost of funds. The cost of funds moved by about 7 basis points during the quarter. We are confident or we are hopeful that as we progress further into the year, we'll be in a much better position, given that 70% of our asset side is still fixed rate. [Gaurav clarifies credit card credit cost trajectory]: Sorry, I just have a correction, right? On the credit card stuff, right? So next year, our credit cost is going to be elevated in the first half. And in the second half, it will probably start approaching towards more normalized level that Sanjay Ji mentioned of 6% to 7%, right? But as a result, my full year credit cost on credit card will remain elevated above a normalized level.

▸ Other Q&A (10)
Kunal Shah · Citigroup

Thanks for taking the question. Firstly, sorry, again, on credit cost front, so when we look at the accelerated provisioning that seems to have been done largely towards the GNPAs and making 100% provisioning on the unsecured. But when we look at it overall in terms of the SMA pool as well as when you indicated that MFIN2.0 guardrail is also getting implemented, and there is a proportion of book which is linked to it. So would that mean that credit cost over the next couple of quarters will still continue to be elevated?

Kunal, so fundamentally, no new change as I said last time. We expected that the Q3 and Q4 of last year would be the highest level of credit cost as a quarter basis. And then they will gradually decline from a Q1 to a Q2 perspective. Obviously, some degree of additional provision that we have taken will be helpful in those quarters. But fundamentally, MFI will take two more quarters to reach near normalcy as we would see. And I think that should pretty much come from a credit cost perspective in Q3 to Q4 kind of a time frame. [Sanjay Agarwal adds]: what we have done this year is around 1.3 kind of credit cost on total assets. And we are expecting that our credit cost can be around 85 bps for next year. It's basis that first 2 quarters will have an elevated cost on microfinance and credit card. But quarter 3, quarter 4, we are expecting strong pullback. [Sanjay clarifies segment numbers]: credit card, like you are seeing around 11% -- 12% for this year. It should be around 6% to 7% for next year and MFI also should be around 3%, 3.5%. [Gaurav adds CGFMU coverage trajectory]: this percentage will only increase going forward. And we expect more than 75%- 80% of the book to be covered under CGFMU. [Sanjay on universal license timeline]: I would say this calendar year. Decision should happen in this calendar year.

Piran Engineer · CLSA

Congrats on the performance in this turbulent environment. Just two questions from my end. Firstly, out of this INR894 crores slippage this quarter, how much would be from the wheels portfolio? And what was it versus, say, last quarter? And also just a clarification in the initial comments, opening comments, Gaurav, said it will take 1 to 2 years for the credit card franchise to turn around. So by that, you mean breakeven? Or what exactly did you mean by that?

[Prince Tiwari first]: So we don't give individually portfolio-wise data. But having said that, it's -- like we have said in the presentation as well that Q4 was a strong quarter and followed the historical trend. So every business saw reductions in slippages, barring maybe 1 or 2 on unsecured side. [Sanjay Agarwal on credit card breakeven]: Of course, I think the expectation around our credit card or maybe unsecured business is to generate at least maybe 4% to 5% ROA, right? So -- and the first level to get to that to have the breakeven. So I strongly expect to break even by next year, which is the 26-27, and from '27 onwards, it will start giving us some money. Of course, not to have a 4% - 5% ROA in '27-'28, but at least give us some kind of positive profit from that year onwards.

Pritesh Bumb · DAM Capital Advisors

Sir, two-three questions. One is on the bulk deposits. What I see as a trend is that we have grown strongly on bulk deposit, despite CD ratio being comfortable. Any strategic intent there?

Not really. I think the whole system was like this. The CA and SA remain under pressure, right? And we also have grown our retail deposit, right. But I think the heavy lifting has been done through wholesale deposits. So I think our ALM, our CD ratio, LCR, all remain very strong. So nothing is specific. I think it was a flow of business. [Follow-up on REG]: No. My friend, REG business is only 3% of our overall assets. I know but overall it's just 3% of our overall assets. So we never had an intention to grow REG out of the context and that business is doing well.

Anand Swaminathan · Bank of America

I have a couple of questions. The first question, when you get your universal bank license, does this guidance around 2 to 2.5 the system growth still hold. And why I ask this is none of the other universal banks are growing beyond 20%, 21%. There's no doubt about your capacity to grow. Just wanted to understand will there be any self-imposed limit or regulator is okay with you growing 25 %-plus even after becoming a universal bank. And number two, when do you next expect to raise capital? Will this be this financial year or next financial year?

So Anand, there is nothing as such rule or compulsion from anybody to grow in that kind of numbers, neither the regulator has stopped us. It is basis on the - as of now positioning of us that we are around INR1.5 lakh crores of assets. So we are not too small, not too big for next 2, 3 years. We can grow in the range of 25% -- so it's not related to universal to very honest. It's related to our size. So once we reach maybe around INR3 lakh crores or INR4 lakh crores, we might say that you want to grow in the range of 20 %. I personally believe that last 3 years remained very tough for all of us. Now the entire narrative from the regulators, from the government of India, -- I know there are short-term uncertainties, but I see a lot many things coming back to Indian economy in the next maybe 18 to 24-month period. [Capital raise]: And for the capital raise, Anand, we want to, I think want to relate that with our universal license decision. [Macro feedback follow-up]: it's mixed feeling. If you ask me, things are looking good from last maybe 2 months. Their action is speaking louder than what they were telling. anything which we were expecting that India will shine and India will grow in the range of 7.5%- 8%, it is not there. So people have now become more rational. People have become more cautious. And in this time, whoever want to build business is sure about the entire spectrum. And so that's why in our opening remark Gaurav very categorially commented that any kind of euphoria has gone away. And when euphoria goes away, the reality is there.

Nidhesh Jain · Investec

Hello. Am I audible? Hi, sir. Good evening. So the first question is on credit card, what all changes we have made on the credit card in the last 12 months and when should we start seeing increase in new credit card sourcing?

Yes. So Nidhesh we have taken a complete course correction. So as we commented earlier that we were doing digital underwriting for lending the credit card. So now we have put in lot many gated condition to understand customers better in the sense that what is his income level? What is his identity, address, kind of stability and all those things. We also have not allowed customers to misuse the card or many of the expense like rent or utility and all those things. So, we have have not allowed our customers, that's why our spend has come down from INR1,900 crores or INR2,000 crores level per month to now INR1,000 crores level per month. And we have also brought in the specialized credit guy from the industry to help us to build underwriting and the portfolio there. We have also not - want to source through the DSA channels and all those things. We want to really build more on our ETB side, existing bank customers. So these are the things we have already done it. That is why the issuance has come down from 40,000 to 45,000 level to now 10,000 level. But you will see that issuance coming up to the maybe around 20,000 cards a month maybe post September. So we want to take another two quarters to really make it completely repair and then build it. [Follow-up on cost-to-income]: So Nidhesh, largely we haven't stopped any kind of investment to be honest. I would only highlight three key items. One maybe a marketing cost. So, we deliberately hold it because we want to now tie up with our universal license base, so that it helps us there. Second, expansion. Last year, we got the expansion from Fincare. And third, of course, tech. my cost-to-income might not be around 57% this year, but should not go up above 60% also.

Rohan Mandora · Equirus Securities

Sir, firstly, the 30 basis point Q-o-Q decline in incremental yields that you have seen. So did you have any component of year-end discounts or in the secured business? Or is it purely a function of a change in loan mix?

That's more a function of mix, nothing else. There is obviously some impact of year ending on the secured side. There might be a slight bit element of that, but I think it's largely a function of mix. [Wheels follow-up]: So I think this quarter, we saw some strong uptake on the tractor side. Given the seasonally the rains has been good. So I think this quarter, the tractor definitely outperformed. Even on the used vehicle segment side, I think we have picked up. [Uttam adds]: So overall, Q4 was flat, but second half of March, there were some traction towards vehicles as we saw in the industry. [Credit cost denominator follow-up]: So, Rohan, everywhere, we have used the gross loan portfolio or the AUM, the average of that, the average AUM for the period.

Pranuj · JPMorgan

So a couple of ones. So one is at what level will you be comfortable in growing your MFI book in line with your overall loan growth? Because if you're guiding for a 20% to 25% perhaps loan growth, then starting from second half of FY '26, could we see MFI book growth materially pick up for the share to increase from the current 6% level? And also in that context, in FY '26 in particular, how will you look to manage your PSL compliance on SMF and the weaker section? And second one is that even with you doing CGFMU across most of the incremental disbursals, does that initial guidance that you had said that you would want to maintain a 3% coverage on your overall MFI book still hold or all incremental disbursals?

I think a very good question. So I think we will continue to have 3% credit cost provision irrespective of our coverage under these government schemes. But by this year and we expect ~80% of our book to be covered under this scheme. So I think by what just Gaurav commented that we want to protect our future from any downside risk from the credit cost of this business. And that is why we are more bullish now that this is not a very... I would say it's a very important strategic change, which we have brought in, in the microfinance book. But overall, we've already said that unsecured piece won't be going above 15%. And in that -- and MFI will not go above 10%. So we want to be in that numbers for maybe the next couple of years. [Prince adds]: And Pranuj, if you see the secured business, even in this year has grown by 23%. Right. The commercial doing 30% plus and retail secured doing about 21%, 22%. So honestly, even the other businesses, the unsecured businesses, which you mentioned, they were down 17%. So If they're just neutral also, we should broadly start scaling up. Right. [Follow-up on MFI capping]: Yes. But with the cap of overall 10% of our overall book from MFI, maybe another 5% unsecured. That's the overall cap. [Prince]: Yes. And it's a long runway, Pranuj, because MFI currently is about sub-6, right?

Ashlesh Sonje · Kotak Securities

Sir, first question is on asset quality. Last quarter, I remember you had indicated some elevated slippages in the small transporter segment within vehicle finance, especially in SCV and LCV. Wanted to check with you how is the situation there in that portfolio as of now? And secondly, if you can share some color on collections in the microfinance portfolio in the month of April.

So, yes, I'm Uttam here. So first of all, for the small transporters, small commercial vehicles can say that, loading vehicles -- the situation has improved. The collection has improved throughout the Q4 and more of Feb and March was good collections and good efficiency there. [Prince Tiwari]: Yes. And even on the MFI side, whatever early trends that we have seen. I think things are holding up. [Rajeev Yadav]: So Ashlesh. Obviously, March is always one of the strongest months. But as you know, this was coming out of a credit cycle. So it's not basically meaning that this is a normalized state. So I am fairly confident that Q1 will be better than Q4. [Follow-up SA balance breakdown]: This is too granular. Ashlesh, we can -- you can write to us and we can respond to this because this is -- we don't have this data backup as such.

Shailesh Kanani · Centrum Broking

Yes. So approximately 16% of the portfolio is impacted by MFIN-2 guardrails, right? So in cases where these customers are kind of regular in repayments, are we considering transitioning them to an individual loan product? Because incrementally, industry is also seeing a momentum towards that. So how are we viewing that?

So Shailesh. Individual loans is something which we have to strategically debate and come back and see whether we sort of want to migrate to that and as a general microfinance proposition because it's not just about the impacted customers, it's a broader construct. I would just say that we are working with our customers. We have -- these customers have been well educated over the last 1 or 2 quarters for the guardrails, which have been launched and what we were transitioning to. My personal belief is that the people who are still good with us and not delinquent or NPA, even if they are impacted, a lot of them are having capability or conviction to repay their loans. So generally, we're not seeing, at least as we are tracking April impact on the industry guardrail changes at this point of time. [Clarify model]: we only do joint lending -- JLG model today. We don't do individual model on the microfinance portfolio. Not just to react to the situation, but improving business model thinking and as obviously, there is a learning and improvement that we need to make out of this overleverage cycle. So the model will evolve, but I wouldn't say as a reaction to a guardrail impacted customer.

Pritesh Bumb · DAM Capital Advisors

Yes. So one question was on the home loan NPL side. So that has been inching up a bit. Now, it is more than 1%. Anything on that because we're seeing a little bit of NPLs there?

Yes. So some NPLs have come through, through the transition. As you know, that we had a merger last year and Fincare used to do this business. So we have seen some transition NPLs, but hopefully, we should get back in control going forward. [Sanjay adds]: But the yield is also very high on that book. So it is a risk reward kind of outcome? [Follow-up on tenure mix]: No, We want to be in affordable housing space. And AU was doing as a structure, we were doing more of, I would say, high-end customer in low income group. And Fincare was doing more low income group in the southern side. And in this whole transitioning, you know that there are always a challenge around team retention and all those things, but it's not that high. The absolute amount is very low. So I'm not too worried.

▸ Prepared remarks (5 blocks)
Good evening, everyone. We thank you for your continued trust in AU as we close FY '25, a year marked by continued transformation and resilience. FY '25 unfolded against a backdrop of challenging macroeconomic conditions, India's GDP growth, while still among the highest globally, moderated to around <strong>6.4 %</strong> as per latest RBI estimates. The monetary policy environment remained tight for most of the year with the RBI maintaining a cautious stance amidst persistent core inflation pressure. Elevated interest rates weighed on both credit demand and cost of funds. Additionally, systemic liquidity remained tight for most of the year, leading to increased competition for deposits across the banking system. Evolving regulations also added to the complexity of the operating environment. For a young and relatively smaller bank like AU with a growing but still maturing liability franchise on SFB platform, these conditions are particularly demanding, testing our agility and strategic focus. Yet, despite these macro and structural headwinds, AU delivered a strong and well-rounded performance across key financial and operational metrics. We delivered strong growth with our deposit book growing by 27% year-on-year versus banking sector deposit growth of 10.1% and our loan book grew by 20% Y-o-Y versus banking sector loan growth of 10.8%, despite degrowth of 18% in our unsecured book. We delivered an ROA of 1.5% despite significantly higher credit costs in MFI and credit cards and after strengthening our provision coverage by making an accelerated provision of INR150 crores. Our EPS grew by 19% and book value per share grew by 23%. Our deposit base crossed INR124,000 crores this year, growing by 27% year-on-year. If we take into consideration the fact that we also replaced Fincare deposits of around INR4,000 crores, which were at higher cost, underlying deposit growth comes to 30% plus. Our cost of funds came in at 7.07 % versus our initial guidance of 7.2% to 7.25% and controlling our opex and marketing costs. In FY '26, we plan to open around 70 to 80 new branches, mostly in the top cities and enabled around 75 existing asset centers in district and tehsil headquarters to start taking deposits.
Our loan portfolio growing by 20% year-on-year, reaching INR115,000 crores, which is around 1.8x of the system growth rate. Retail secured assets grew by 21% and commercial banking grew by ~32% year-on-year. On the unsecured book front, our unsecured book de-grew by 18% for the year. Microfinance segment continued to face industrywide deleveraging and our MFI book declined by 17%. However, we believe we are nearing the end of this corrective cycle with continued improvement in collection efficiency, which touched 99.2% in March and 98.7% for the full quarter. Nearly 100% of our Q4 disbursements would be covered under the guarantee, taking our overall portfolio covered to ~36% by the end of this year. Our credit card book has gone through a period of recalibration in FY '25, declining by 19%. We need to be patient as it will take 1 to 2 years for our credit card franchise to turn around. We have applied for universal banking license in September. Our application is under review by RBI. We remain in regular touch with the regulator, and we are hopeful for a timely evaluation. In Q4, we also made an accelerated provision of INR150 crores primarily in unsecured to strengthen our provision coverage. This provisioning was over and above our provision policy and our coverage on unsecured businesses is now almost 100%. Our cost income ratio reduced from 64% in FY '24 to 57% in FY '25. As we look towards FY '26, we see benefits of policy tailwinds with interest rate cuts, better system liquidity and change in policy stance from neutral to accommodative. However, we are in a new normal environment where post COVID gains are over, GDP growth is likely to be range bound and some sort of macro or geopolitical uncertainty could be business as usual. In this uncertain environment, we are watchful and are not providing any specific guidance for FY '26. Over the medium to long term, we believe our franchise has the potential to sustainably deliver ROA of around 1.8% with business growth of 2x to 2.5x of nominal GDP.
Throughout the year, last financial year, GDP was under pressure. Inflation was there, the broken momentum, liquidity issues, I would say, very low business confidence. Credit cost, of course, remain around 1.3, including the accelerated provisions, but should be now on a normalized basis this year, which we are thinking in the range of <strong>75 bps</strong> to 85 bps. Next year, it may be on the higher side of the curve, maybe 85 bps. So we'll get advantage in our credit cost next year. But NIMs can be in pressure because still -- the real benefit of interest rates coming down will only get materialized maybe in quarter 3, quarter 4. Idea is to really keep it below 60%. We are all expecting that this financial year, we should get promoted to Universal One. So there can be a special effort for marketing around that.
We delivered profit after tax of INR<strong>2,106 crore</strong>s for the year and ROA of 1.5% despite significantly higher credit costs driven by stress in MFI and credit cards book. In Q4, we also made an accelerated provision of INR150 crores primarily in unsecured to strengthen our provision coverage. This provisioning was over and above our provision policy and our coverage on unsecured businesses is now almost 100%. We also did a lot of work this year in improving our operating efficiency, and our cost income ratio reduced from 64% in FY '24 to 57% in FY '25. This was driven by tight control on overheads and marketing costs, lower credit card issuance volume and synergies from Fincare merger.
Our ROA is 1.53, which is maybe lesser than what we guided you last year. But we have done the accelerated provision of ~<strong>10 bps</strong>. So somehow, we don't want to play around our balance sheet. We want to be very honest on our numbers so that it does not get colored by the whole aspect around it. So idea is to really communicate to you people very honestly that this 10 bps is on the NPA, so that our provision coverage goes up to a ~70% level and its NPA on the unsecured assets gets 100% covered. Last year, it was phenomenal. And honestly, we got from 63 to 56. It's not easy. So we had some kind of, I would say, low-hanging fruits but we really want to build more distribution.
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