Please note that this conference is being recorded. I now hand the conference over to Mr. Prince Tiwari, Head of Investor Relations. Thank you. Over to you, Mr. Tiwari.
Thank you, Darwin, and good evening, everyone, and welcome to AU Small Finance Bank's earnings call for the first quarter of financial year FY 2025-2026. We thank you all for joining this evening, and I do understand that probably for most of you this is a very long day. Thank you once again for joining the call. On today's call, we have our Founder, MD and CEO, Mr. Sanjay Agarwal. We have our Executive Director and Deputy CEO, Mr. Uttam Tibrewal. We have our CFO, Mr. Vimal Jain, CRO, Mr. Deepak Jain, and Chief Trade Officer, Mr. Vivek Tripathi, along with Gaurav Jain, President – Finance and Strategy.
The IR team.
Like previous, similar to last quarter's, we'll start the call with 15 to 20 minutes of opening remarks by Gaurav followed by a Q & A session of 40 to 45 minutes. For the benefit of all participants, we kindly request all the participants to kindly restrict to two questions per participant and join back in the queue should you need to ask further questions. For all data keeping questions, you can always reach out to IR team at.
Any point in time after the call.
With that, I now request Gaurav Jain, President – Finance & Strategy, to share his opening remarks.
Gaurav, over to you.
Thank you Prince. Good evening everyone and thank you for bearing with us on a Saturday evening. Let me begin with a quick look at the operating environment. Q1 was a seasonally muted quarter with subdued macro and weak underlying demand. System level credit growth continued to decline and was 9.5% in June versus 16% in FY 2024. On the ground, operating environment also remains mixed although we could see improvement as the quarter progressed in May and June. On the plus side, RBI's policy rate cuts, liquidity infusion, and announced CRR cut have provided support. On the deposit side, we expect the broader economic environment to improve in the second half of the year supported by balance, rural demand, revival in urban demand, uptick in investment activity, and government's continued thrust on CapEx. In this evolving environment, AU continued to deliver robust performance.
We delivered strong growth with our deposit book growing by 31% YoY which was nearly 3x of the system growth rate and our loan book grew by 18% YoY which is nearly 2x of the system growth rate. Notably, this growth was delivered despite degrowth of 23% in our unsecured book. PAT grew by 16% YoY and we delivered an ROA of 1.5% despite margin pressure and elevated credit cost in unsecured assets. Now let me give some color on our businesses. First on the deposits business, our deposit base crossed INR 1,27,000 crore growing by 31% year-on-year. Current account balances grew by 34% YoY and savings account grew by 13% YoY, taking the total CASA growth to 16% YoY. All other key parameters remain in line.
Our cost of funds improved by 6 bps to 7.08% from 7.14% in Q4. We maintained an average LCR of 123% during the quarter which was an increase of 7% from last quarter and our CD ratio excluding refinance stands at 79%. Our branch profitability improved with 49% of our branches which were in existence in December 2023 becoming profitable in Q1 versus 34% a year back. During the quarter we undertook pricing cuts on SA and FD in line with the easing rate cycle and our comfortable liquidity position. Peak SA was reduced by 50 bps with up to 100 bps reduction in certain buckets as compared to March 2025 and peak FD rates were reduced by 90 bps to 7.1%. We continue to prioritize our strategy of driving granular retail deposit growth through focused customer acquisition, tailored product offerings, enhanced customer engagement, and improved sales productivity.
We have a full product suite with cutting-edge digital channels catering to diverse needs of our deposit customers. These include various segmented savings and current accounts offering insurance and wealth solutions, credit cards, unsecured loans, and FX. Our well-structured distribution channels are scaling efficiently, enabling us to deepen customer relationships and expand our deposit base sustainably. This year we will add around 17 to 18 new deposit branches, mostly in the top cities. Our team is well poised to drive the next phase of growth, backed by deep domain expertise, strong execution capabilities, and alignment with strategic priorities. Now moving on to our assets franchise, our loan portfolio grew by 18% year-on-year to reach INR 117,000 crore. Growth was led by our core secured segments, which include retail secured assets and commercial banking assets.
These two portfolios formed 88% of our total loan book and grew by 22% year-on-year. Our retail secured assets book, which stands at around INR 79,000 crore and forms 67% of our total loan portfolio, includes Wheels, mortgages, and gold loans. This is our flagship business with a legacy spanning over two decades and is a distinctive blend of scale, growth, high yield, and robust asset quality, making it the cornerstone of our asset strategy. This segment continues to deliver strong performance with growth year-on-year and 3% quarter-on-quarter. Now let me talk about the key products within retail secured. First is Wheels. Our Wheels book is around INR 38,000 crore, which is 32% of our total GLP. The book is largely fixed rate and is well diversified across new and used personal and commercial cars, SCVs, LCVs, tractors, and two-wheelers.
The Wheels segment has continued to deliver strong and consistent growth. GLP grew by 26% year-on-year, which is market leading in our segments. Portfolio yield increased by 3 bps quarter-on-quarter and is north of 14%. We are significantly expanding the distribution in the Wheels segment, leveraging erstwhile Fincare branches in UP and South. Wheels distribution increased from 550 branches in March 2024 to 715 branches in March 2025, with another 200 plus branches set to go live in FY2026. This implies an increase of 70% from March 2024. We expect the growth to remain strong for the full year with multiple growth levers, including diversified book, strong used vehicles contribution, and ongoing distribution expansion. Credit cost remains broadly in line with our expectations in a seasonally weaker Q1.
Segments which are showing stress in the overall industry, for example, used SCV and HCV, are a relatively small proportion of our book. We do not see any cause for concern and expect asset quality in these segments to normalize in the second half as per trend. ROA for the segment remains strong and is consistently above 2%. In addition, the portfolio contributes meaningfully to our PSL and SSMF obligations. The second key product is mortgages, which stands at around INR 39,000 crore and forms 33% of the total GLP. It includes micro business loans and home loan. Total mortgages portfolio grew by 14% year-on-year and 1% quarter-on-quarter. Within this, MBL and home loans respectively grew by 15% year-on-year. More than 70% of the MBL book is fixed rate and ROA for the book is greater than 2.5%.
There is no comparable peer operating at this scale and yield in MBL. We are working to increase the growth rate of this book to over 20% by next year. Similar to Wheels, we are increasing our distribution. MBL branch count increased from 532 in March 2024 to 924 branches in March 2025 including merger. We are planning to increase this by another 200 plus branches in FY26. However, competitive intensity remains high in this segment and there could be potential downside risk to our growth target. Credit cost is slightly above our expectations, primarily driven by deterioration in our southern book, which is around 15% of the total book. However, this south book is also higher yielding at around 17% to 18% versus 14% for the rest of the book.
We have taken further measures to strengthen the collection and security enforcement infrastructure and expect normalization by the end of year for the southern mortgages. The third product within retail secured assets is gold, which has GLP of around INR 2,000 crore and comprises 2% of the total loan portfolio. Gold loan portfolio grew by 11% year-on-year and 4% quarter-on-quarter. There is no risk weight for gold loans. Portfolio yields around 16% and ROE is north of 3%. RBI's unified guidelines for gold loans have harmonized norms across banks and NBFCs, allowing banks to compete more effectively. We remain compliant with the guidelines and believe there is an opportunity to build and scale our gold franchise significantly. Leveraging the capability acquired through the Fincare Small Finance Bank acquisition, distribution network has increased from 350 branches in March 2024 to 850 branches in March 2025 post merger.
We are further investing in scaling the sales and operations team and experimenting with branch formats to increase disbursement TAT. The second key asset segment is commercial banking, which is 21% of the total loan portfolio and includes five businesses: business banking, Agri banking, Emerging Enterprises and Financial Institutions, Real Estate, and Transaction Banking. We have a full product suite and tech capability, including the AD1 business, which we started last year. We established a good track record over the years with strong growth, stable asset quality, and consistent ROA of about 2%. Total GLP grew 30% year-on-year and 2% quarter-on-quarter, and we expect full year growth to remain strong as per expectations. Asset quality also remains in line with expectations. So far, we have discussed the secured asset portfolio.
Now let me walk you through the unsecured segments, which degrew by 23% year-on-year and 7% quarter-on-quarter and form 8% of our total loan portfolio. The largest unsecured segment is the Inclusive Finance Book for bottom of pyramid customers, which includes microfinance (MFI) and lending to small marginal farmers and FPOs. This book is key for fulfilling our PSL obligations in SMF and Agri and contributed more than half of our SSMF requirements in FY2025. Total book is around INR 6,500 crore, which is around 6% of our total GLP. MFI is the biggest product in this segment, with the bank having comprehensive micro banking relationships with customers and including savings accounts, insurance, payment solutions, and DBT linkages. MFI has GLP of INR 6,200 crore and is facing twin challenges of asset quality and book degrowth.
In the current credit cycle, the book degrew by 22% year-on-year and 7% quarter-on-quarter. We expect the book to have bottomed out this quarter, achieve stability in Q2, and grow thereafter. We are targeting INR 7,000 crore book by year end, implying a year-on-year growth of 5%. On asset quality, the performance was also below our expectations. Collection efficiency for the quarter dropped to 98.3% versus 98.7% in Q4, driven by seasonality, state ordinance in Karnataka, as well as impact from MFIN guardrails coming into effect. This has pushed back the expected recovery by a quarter, and we now expect full year credit cost to be higher at around 5% versus our previous expectations of 3% to 4%. We have taken a number of operational steps to strengthen the business, including increasing the collections team and securing cover under the CGFMU Credit Guarantee Scheme.
97% of Q1 disbursements are covered under CGFMU, taking the portfolio coverage to over 50% by end of Q1. We are observing asset quality improvements sequentially after MFIN guardrail implementation and will continue to update as things evolve. The other unsecured book is our credit card and personal loans business. Total GLP is around INR 3,000 crore, which is 3% of the total loan portfolio. Of this, credit card book is around INR 2,300 crore, which saw a T growth of 27% year-on-year and 6% quarter-on-quarter. Credit cost remains elevated in line with our expectation and may have peaked this quarter in absolute terms. Most of the flows have come from the identified pool where we have already taken actions to reduce credit limits. Credit costs may remain elevated in Q2, but we expect it to start normalizing from second half onwards.
Now, in terms of profitability, we delivered profit after tax of INR 581 crore for the year, up by 16% in Q1. Last year, ROA for the quarter was 1.5%. Despite margin pressure and elevated credit costs in unsecured book, our net interest margin declined by 38 bps in the quarter from 5.8% in Q4 to 5.4% in Q1. This decline was due to the following key drivers. The first is reduction in asset yield by 27 bps from 14.4% in Q4 to 14.1% in Q1. This was due to repo cut impact on variable book, lower asset yield primarily in credit card, and change in asset mix with lower MFI. The second reason was reduction in investment yield by around 20 to 25 bps in Q1. This drop was driven by lower rate environment and booking of treasury gains.
Third was due to effect of higher liquidity, including investments in mutual funds carried during the quarter, which had an impact of around 10 bps on NIM. This is expected to reverse as the year progresses. These yield declines were partially offset by decline of 6 basis points in cost of funds from 7.14% in Q4 to 7.08% in Q1. Going forward, while there will be further impact on asset yield in Q2 from repricing of the variable book, this would be partially offset by lower cost of funds and reversal of high liquidity as the year progresses. Q2 should be the bottom for NIM and we should start seeing gradual improvements in margins from Q3 onwards assuming no further rate cuts. Other income saw a healthy contribution driven by treasury gains and ongoing strength in core fee income. We also maintained disciplined control over operating expenses.
OpEx by total assets fell from 4.2% in Q4 to 3.9% in Q1, partly driven by lower disbursement in the quarter. Cost-to-income ratio was 54% which benefited from higher treasury gains in the quarter. Our credit cost remained elevated in Q1 driven primarily by unsecured segments as elaborated earlier. Overall, based on the Q1 performance in MFI and our South- based mortgages portfolio, there is a downside risk to our previous guidance and we increase our full year credit cost expectation by 10 to 15 bps, taking the expected credit cost to around 1% of average total assets. To sum up, Q1 was a quarter of steady execution in a transitioning macro environment. We remain confident in our strategy, our customer-centric model, and our ability to deliver consistent performance. With that, I now hand over to Prince for Q& A. Thank you.
Thank you.
Gaurav . Darvin we can now open the floor for questions.
Certainly sir. Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press STAR and 1 on their touch- tone telephone. If you wish to remove yourself from the question queue, you may press STAR and 2. Participants are requested to please use handsets while asking a question and to limit yourselves to two questions per person. You may rejoin the queue if you have further questions. Ladies and gentlemen, we will now wait for a moment while the question queue assembles. The first question comes from the line of Renish from ICICI. Please go ahead.
Yeah. Hi sir, just two things from my side. One on the overall profitability, you know, from 2026, 2027 perspective. We have increased our credit cost guidance and when we look at earning reduction in Q1 and also we think that it will further go down in Q2 and then bottom out. How do you expect, you know, ROA settling in 2026 and 2027 considering pressure on NIM and credit costs in 2026.
Yeah.
We haven't guided for an ROA for FY26, and we reiterate our guidance of achieving 1.8% ROA for FY27.
We'll stick to our guidance for 27, right?
Yeah.
Okay. Secondly, on the Wheels (vehicle financing) piece, you did mention about some stress in UCV, you know, CV and CV segment. Can you please elaborate further? I mean, is it geographically specific or is it broad based largely due to the weak macros?
This is Vivek. First of all, that used SCV book and used HCV book is a very, very small proportion of our total assets. About 6% of the total Wheels asset is in that segment. The trend did not start this year. The trend started last year crossing the Q1 because of the delayed CapEx. There was heavy rain last year, so the pressure started building up in that segment and we took a lot of corrective measures in Q3 and Q4 of last financial year, and the book is performing very well post that.
Right.
There is a very, very little impact. It's not geographically specific, it's just specific to one segment, which is used small commercial vehicle. Anyway, we don't have much of a presence in HCV, so we are not there in that segment. Nothing to comment about that.
Dinesh, I'm Sanjay Agarwal this side. Just to add on about Gaurav's comment, this year too, of course we all believe that the Q2 NIM will go down, but there is all probability that Q3 , Q4 NIM will be more expanded. Right. In terms of our credit cost, because we guided around 85-90 bps, because of this one quarter going up for MFI, we believe that 90 bps might not be achievable. We're just calling out so that you people can figure out in your calculation that that can be 100 bps. One thing we show is that this year will remain stronger than last year. Last year we performed around 1.4, right, in terms of our ROA. Next year we want to be at 1.8. This year, of course, it has to be on an upward trend.
Difficult as of now because again, not many variables in the environment, how the Indian economy will happen. What they made me more rate cut, you know. Of course we haven't guided an absolute amount in terms of growth. We are relativeness there. If we are growing at 6.5 and then the inflation is around, you know, 3%, 6.5% and overall nominal GDP is around 9 and then we can't grow in the range of 25%. Right. I think it has such a. Next year why we are sure because it will be a sizable balance sheet. The entire NIM pressure will go away. We have a 70% book is fixed, you know.
Right.
We are more sure about next year, and you know, not much correction will happen in MFI, in the credit card too. I think again I'm reiterating this line from now three, four years, that banking franchise require at least 10 years to get stable, stronger, and scalable. Right, so beyond that path.
Got it. Just, I mean, follow up on that, you know.
Some of the stress in this.
Segment, you know, which you did mention about south- based mortgage or UCV and CV, etc. Is this because of the excessive growth in this segment by industry, or there is nothing too much to read into this?
Can you answer it here?
The south- based mortgage was fundamentally.
Different from.
What we used to do in North and West, it was a very high yielding book at 18%, 18.5%. The ticket size was smaller, obviously. So the inherent customer profile and inherent.
Risk was also different.
The reward was also different. We had already taken measures in terms of building that collection infra, having the complete setup in terms of doing the survey and legal recovery, which would yield results. Now, because it was under different setup, fundamentally we had this recipe to run this business since long. We replicated across the geography. We would see results in couple of quarters.
Right.
Not fundamentally very different.
I mean fundamentally this one.
Sorry to interrupt.
Renish, we request you to please rejoin the Q&A further for the questions. Thank you. Participants, we request you to please limit yourselves to two questions per participant. You may rejoin the queue for follow- up questions. Our next question comes from the line of Suraj Das from Sundaram Mutual Fund. Please go ahead.
Yeah, hi, thanks for the opportunity. One question, I mean on this credit cost again on this unsecured MFI, credit card, personal loan I can understand, but I mean structurally if I see for last 6, 7, 8 years your secured written credit cost has always been 76.0 or lower barring the COVID year, let us say since FY 2020, FY 2018. For last 3, 4, 5 quarters it is only running up and high now, probably this year guidance. The question is structurally what has changed? I mean in the face of growth, have you structurally, you know, loosened some risk filter or have done something like that? Would it be fair to assume that probably that 60, 70 basis point credit cost in the secured retail is not possible anymore? Probably if you're growing at 20% plus, more or less 100 basis point credit cost is the new normal.
That is my only question.
No, no, I appreciate your question. I think two things, you know. One, I would strongly advocate that these businesses go through cycles, right? Unfortunately, a couple of years, you know, the kind of market segment we deal in, there is some pressure in those markets because the economy is not doing well. We have also become Pan- India franchise, team needs some time to settle down. It's a mix of all things. I completely agree that VYPA remains as one of the strongest franchise in terms of collection and asset quality in this segment. I don't think now, because of our size, scale, and the kind of footprint we have now, because at that time we were very too small, things can be managed more macro level, right?
Now at this size, scale, with the Pan- India presence and with this kind of economy trends, you know, we should expect a little bit elevated credit cost which may be in the range of 75, 80. Last year we thought that this year we might be at 85, 90. In securitial asset you will see a lot much improvement maybe next year onwards, not this year in that range, but because MFI is on higher rate, credit cost still in the middle of the work in progress. I think that is why we are around 1% kind of credit cost. I believe that in the given circumstances the group is performing very well.
In addition to what Sanjay Ji said.
There.
Was a complete change in even the provisioning norms. Also, if you're comparing with 2017, 2018, 2019, obviously the PCR on the secured asset was different, right? Because we had a very historical data of the net credit loss. On a bank platform, obviously the provisioning norms change and we had to change accordingly. Those are not actually apple-to-apple comparable. If you adjust for it, there is a little gap, yeah, but not that.
Right.
In terms of underwriting, I mean nothing has changed over a period of time.
Rather I would say we have become more stringent. You know, like previous days it was more about NBFC kind of culture. Now we have actually adopted the whole ARM- slant kind of working. Our sales don't have credit powers. Credit guys don't have a sales target or anything. We are working on our credit team, and Vivek Tripathi sitting on this call has been elevated to Chief Credit Officer to have a credit culture in the bank for the scale, for the scale sustainability.
All the messengers from the future portals.
Thank you. Our next question comes from the line of Kunal Shah from Citigroup. Please go ahead. Kunal, your line has been unmuted. You may proceed with your question.
Yeah, thanks for taking the question.
Firstly, maybe what changed post maybe.
The commentary in the last earnings call maybe wasn't very visible with respect to the stress in microfinance or were there any incremental stress pockets which came in after the last earnings call and even this entire stress on the southern book. Okay, maybe how big was that element in the overall slippage and the credit cost and what actually led to that? Maybe because generally like mortgages tend to behave quite well. You indicated a bit, but maybe what actually happened between the earnings call of last quarter and the results for this period?
Yeah.
Kunal, Vivek here. You know, we had the collection efficiencies in non-OD in microfinance were trending upward of 98.7% by March. There was some anticipation that this would sustain in Q1. It did not happen. It's not that it's with us; industry-wide, those collection efficiencies could not hold. There is a green shoot. If we look at April, May, June, and July, it's looking upward again. It just pushed by one quarter further on that portfolio. What we ensured is that incremental disbursement is happening with the government guarantee, which is still CGFMU. In Q1, whatever we did, 97% is covered by those guarantees. You would have a cap in terms of the credit cost anyway.
Right.
On the southern mortgage piece, as I said, fundamentally it was a very granular book with differentiated yield. It was at 18.5%. There was a transition of team. Obviously, some amount of churn happens when you transition; that would have led to some elevation in terms of the, I would say, decline in collection efficiency. Plus, this was not a very old business with Fincare. In terms of the learning, infra collection and legal recovery has been done by us now. We are very, very confident that we will be able to pull it back in just a couple of quarters because it's not that there is no security, there is no customer. Everything is there. Just the collection infra was not that strong. The legal mechanism to enforce the securities, to do 13(4), 13(2), the infra was not there, which we already built up now.
Kunal, if you, because we are talking more granular in terms of microfinance or in terms of certain markets about MFI, right. Overall, we strongly believe again that we were expecting around 85 bps or 90 bps on total asset credit cost. We are just saying that it may go up by 10 bps and the reasons are like this, which is microfinance and maybe southern market. Otherwise, we believe that H2 will be very strong in terms of recovery because not much, I would say, the data says or trend says that July onwards, you know, things will look better. That's the way I want to sum up about our credit card credit cost estimation.
Yeah.
After this experience on credit cards.
This southern- based mortgages which would again be like AU specific. Do you see any other geographies or pockets wherein we need to slightly strengthen the filters, maybe augment the collection capabilities? Would that be the case? Maybe like reevaluating the portfolio. Do we require to do in any of the geographies or in the portfolio?
Not really, Kunal. Not really, to be honest. Not really. These are also very specifically carved out because we took over Fincare Small Finance Bank from last year itself, and it requires some effort, and of course we need to give some time to the previous leadership. Of course, when we take over everything with our perspective, it requires some more time to really implement all those things. It is very natural. In this acquisition, we got the southern markets for RV business, MBL, HL, so not much growth will also happen from these markets in times to come. It is a temporary kind of challenge. As Vivek Tripathi told you, we have the recipe to solve all those challenges we have done in the past in north and maybe in west market.
Not largely in terms of, we are not telling you that the large issues, but because the numbers are so minuscule, because going from 90 bps to 100 bps, we thought that let the market know that we are really working. Right. Yeah.
is fair to say this was Q4 FY 2024.
We request you to please rejoin the queue if you have follow-up questions. Thank you. Our next question is from the line of Ashlesh Sonje from Kotak Securities. Please go ahead.
Hi team. Good evening sir.
First question is on your loan growth outlook for FY 2026.
Now that we are seeing some signs of stress in some of these segments, how do you think about your outlook for loan growth in 2026?
Hi, Ashlesh, Prince here. Ashlesh, I think when we did the last call we had guided that we want to peg our growth, given the size, to the economic activity in the country. We had said that we look forward to grow anywhere between 2 to 2.5 times of nominal GDP.
Right.
Some of the stress was expected. I think when we did that call we very clearly articulated that stress on the unsecured side would take a couple of quarters to resolve itself before it kind of picks up the growth pace. That was factored in. I don't think fundamentally anything changes there. We will still target anything within 2 to 2.5 times of nominal GDP growth. Even on this quarter, on a year-on-year basis, we have grown by 18% and you know, Q1 is a seasonally weak quarter. I think growth will pick up most of the impediments to the growth, at least at the economic level as well. In terms of the liquidity, the entire inflation, the CRR cuts have been announced. Some of those things have reversed.
Right.
Hopefully, at this point we can only hope that the economic activity picks up across the country and the growth goes through. From our perspective, we are very, very clear that the heavy lifting on the growth from our side will be done by vehicle financing, commercial banking, and gold loans. All of these portfolios can grow anywhere between 20% to 25%. That's the target that we are doing. Vehicles this quarter as well has grown 26% YoY. As far as mortgages are concerned, which is the other bigger portfolio, you know that we have been growing at about 15% for the last three years on a CAGR basis, primarily a lot of competition there and we have now added to put up a lot of distribution there as we have articulated earlier as well.
Given the entire franchise that has become available from the south, there were certain gaps which Vivek articulated that we have already fulfilled and we are pretty confident that we'll be able to grow that business. The immediate target on the mortgages side is to take that business from 15% to 17- 18% growth this year and maybe 20% plus in the subsequent years. I think we are there. It's a function of how much economic support. The only surprise to your question as well, and that's a more market-wide surprise, has been the microfinance because our view was that probably it should start growing a bit but again it has degrown by 6% this quarter as well.
Given the entire actions that we have taken, some of the credit filters that we have relooked at, the risk filters, we do think that this is the bottom and even in the microfinance business I think from this quarter you should see stabilization and maybe some sort of a growth from, as Gaurav articulated in his opening comments, that about 5% kind of growth that we are expecting for this financial year.
Thanks, Prince, for the elaborate response. The second one is on the credit card book. I see that there is still about INR 700, 720 crore which is sitting in the Revolver portfolio. Do you have a sense of how much of the overall book or out of this Revolver book can eventually flow into NPAs or have to be written off? That is one. Related to it, I see that you have restated the share of Revolver in the credit card receivables for the March 2025 quarter from 38% to 35%. Can you explain that one, please?
I think the last year, you.
The 37% that you saw, that was a mistake, right? That was just a mistake that got carried. The correct number for March 25 is 35%. We had uploaded a revised presentation.
On that as well.
For the rest I'll hand it over to Vivek.
Yeah, so in terms of whatever stress we see in this book, the majority of that is coming from identified pool where we did some limit decrease function, and that pool is reducing every month. We've already indicated, as Gaurav also mentioned in the call, that in absolute term I don't want to guide in terms of %, but in absolute term the credit cost has peaked. It would start coming down from this month, this quarter onward, and we would see substantial decrease. Right. We know what pool is performing, and plus on the new acquisition side we have taken a lot of initiative, which obviously everything takes its own time. We're coming with a new scorecard. We're coming with new platform to host those scorecards, new and lowest. That scorecard for ETB, NTB, and for behavioral, this thing, some of it's already started. The work has already started.
It takes a couple of months to implement, and then the degrowth on the book probably will try to arrest in maybe Q3 onward.
Understood.
If I could just squeeze in the last one, this mortgages book, slippages that you are seeing in the south portfolio, roughly what proportion of the book do you think is exposed here?
We have 15% book in southern market. I think Gaurav has already articulated. It's not that the difference is that large. We just tried to explain that on the retail secured side from where the slippages has come. We thought let's call out which segment. It is just a sub segment of the entire book which is very, very minuscule.
Right.
It's on high yield. Yeah, it's a very high yield.
Understood.
Thank you.
Thank you. Our next question comes from the line of Param Subramanian from Investec. Please go ahead.
Yeah, hi. Thanks for taking my question. First question is on OpEx growth. It's at 4%. Really a smaller franchise that is growing.
Right.
What explains that? Other operating expenses, I think, are down on a YoY basis. What is happening there?
What's the question?
The question is other offices down on a YoY. Prince here. As we have, if you look at on a last full year commentary, as we have articulated multiple calls, there was a lot of internal focus around productivity and efficiency gains.
Right.
We also cut down a lot of cost expenses, rationalized a lot of expenses around our entire digital marketing. The entire above- the- line marketing and branding was not really taken. Also, the fact that the credit card issuances have kind of slowed down led to some savings. It has been a very focused and disciplined effort by the entire team for the last full year in terms of trying to control the other OpEx. As far as manpower is concerned, overall OpEx has grown by 10% YoY, and we have added people. We are adding people wherever it is necessary. You will also understand that the franchise has come to a certain scale. There is also some amount of synergy which came from the merger.
Right.
In terms of people OpEx, all of that has led to a very disciplined execution on the overall OpEx front from our side.
Got it, Prince. How to think about OpEx growth going ahead or cost-to-income, cost-to-assets, any of this.
It's difficult to call out, you know, because again businesses will pick up. Q1 is typically a seasonally slower quarter. As we move further during the year and if the economy picks up, we do want to grow, we have growth aspirations.
We have talked about it earlier.
Right. I would like to say, or leave it at that, that overall you will see some amount of efficiency on a year-on-year basis that we are trying to achieve. I don't want to put a number to it.
Just to add, the previous guidance that we had given on cost-to-income ratio is for that number to stay below 60%. Last year I think we ended at around 57%. I think our endeavor is to stay below 60% on a cost-to-income basis and on a cost-to-OpEx basis. As Prince mentioned, the target would be to do better than last year, which was I think 4.3% or something.
Okay, very helpful. Gaurav and Prince. On your slide 11, right, you are calling out the credit cost across segments, which is very helpful. You are showing this region retail secured is at 1.2% annualized. What is it as in is.
The first quarter seasonally at this level?
Are we seeing weak or are we seeing more weakness than normal here?
It'S.
Largely a seasonal impact, and we already called out the few sub-segments within that there were some elevated credit costs. Our franchise, our strength to execute those products, and ability to underwrite and understand those segments remains very high. This is only a seasonality which obviously had played a role, and some amount of weakness within the underlying economy. That also you can't take out of the equation.
Right.
I think the good monsoon, the good rural income, a lot of things we look forward to improve Q2 onward. There is a festive season as the festive season would kick in by end of Q2 and Q3. Anyway, changes in our customer segment.
In my opinion, the Q1 growth and Q1 credit cost cannot be analyzed.
Right, got it.
Got it, Sanjay sir. Would it be.
Sorry to interrupt. We request you to please rejoin the queue if you have further questions.
One last question only.
Yeah.
Yeah, okay. Okay.
Okay. Thank you so much. Would it be fair to say.
This increase in credit cost is purely.
What we are seeing on the unsecured side? There is nothing to do with the retail secured business.
We were very, we were knowing about in last quarter call that Q1 , Q2 will remain elevated. As Vivek told you, in absolute amount the credit card cost is already peaked. We are saying that MFI also, we believe that Q2 , it should be the quarter where the credit cost will be peaked. Other than that, everything remains absolutely in shape.
Okay. Thank you so much. Thank you so much, sir. All the best to the team. Thank you.
Thanks, Param. Thank you.
Thank you. Our next question comes from the line of Nitin Aggarwal from Motilal Oswal. Please go ahead.
Yeah. Hi, good evening everyone. I have a couple of questions. One is around the credit card portfolio only. Like while Sanjay, you mentioned that the credit cost has peaked, as I see, like the pain that this portfolio has given is like more than MFI.
At least in this quarter and even.
In the prior quarters, we have seen.
Very high credit costs.
How do you in the medium term look at this business, how quickly will we want to rebound in this, and what is the medium-term strategy?
On the credit card now?
Yeah.
Hi.
Hi Nitin. Good evening. Nitin, you're absolutely right that credit card cost is giving us more pain than an MFI cost. MFI business remains still profitable for this year after this elevated credit cost or maybe regrown of that book. A couple of corrections have already happened. There's a leadership change there. Our product head Arvind has become the credit card business head. This business has again been folded with Yogesh Jain, who's now CEO. He's based out of Jaipur and he's an old veteran in the bank and he understands his business. I believe that under his leadership not much correction will happen. Already from one year itself we have done a lot of correction in terms of our acquisition underwriting standards, collection standards, operating the metrics. That is why we all believe that in Q1 already we have the credit cost peak in terms of actual amount.
This year, Nitin, it will remain like this. The idea is to really understand with the new lenses and with a new fresh approach. If you ask me, I will be better off by this year- end. That is how we are looking towards this business as of now. The idea is to remain again to control the losses and come on the BP first and then look for the growth. I would want time for my investors that they should support us in this journey and give us some more time to really come and clearly say or articulate our future strategy around it. Yeah, right.
The second question, if you can talk about the credit environment in the vehicle business, like a few other lenders have indicated to some rise in stress in the vehicle financing business. How are you seeing that? What kind of growth opportunities are you looking at?
Overall, some color around the environment.
Nitin, again the Wheels business is the oldest business in AU Small Finance Bank and it's now close to 30 years. It's a well-rounded business for us in terms of diversification, pricing, the risk, the credit orientation, and the collection orientation remains sharpest in this book. We are not saying that we will not grow this business this year. The environment is tough, we know that the sale is not happening. Because of the used financing capability, the diversification around product range, be it SCV, LCV, tractors, new cars, and of course with southern market coming up, we are opening up in eastern India also.
I think our growth strategy will help us this year and that is why in this quarter we have grown ourselves by 26% and the team remains very confident that they will achieve the target for this year too with the same matrices where we don't blow up our asset quality numbers or anything else around it. We remain strong in terms of our Wheels franchise overall. In terms of retail assets, as we already commented, our mortgage business is in good shape. Gold business is in good shape. MBL, our mortgage business, we are operating around 14% rate and we already crossed INR 40,000 crore now. I think nobody in the industry has touched this kind of numbers for the mortgages at this rate with this kind of asset quality.
For us, every time when we go to the market, it's a new environment for us because of the scale.
Right.
That is why we are growing around 15%. The idea is to really push this growth rate to 20% in times to come. Again, the southern market and the eastern market should help us to achieve those numbers. Commercial banking remains absolutely in good shape. We will do some kind of re-strategizing ourselves in segmenting that business. Our business banking, agri-banking, NBFC reg, you know, again we are looking for a growth of north of 25%. Overall, well-rounded performance. I know that environment is not that too good till now, but I don't think that will continue and there would be some kind of pull from the markets from maybe Q 3 onwards. Last year also we had the same kind of feeling. In the end we have grown ourselves. Barring something which we are in work- in-progress, we will remain very strong in terms of our approach.
Of course, market might have some kind of impact if it's not as per our standard or as per our expectation going forward.
Right.
Lastly, Sanjay, on the margin, we have reported a sharp dip this quarter, but as 70% of our book is like, so can the recovery also be as quick from the second half onwards?
Your impression is, in terms of name, what margins, margins right now. We were vocal in last call that because when repo rate kicks in, the reduction in repo rate happens, you know, it will have a negative impact on our margins because of immediate transition happening in our yields, you know. I strongly believe this year we will partially recover our margins, Q3 , Q4 . I think the full recovery will happen next year.
Okay, sure.
Thank you so much.
Thanks for all the insights.
Wish you all the best.
Thanks Nitin.
Thank you. Our next question comes from the line of Pritesh Bumb from DAM Capital Advisors. Please go ahead.
Hi. Good evening team. Just wanted to check when we say our 1.8% ROE for 2027, have we also built or have we basically tried to build in a cross- cycle MFI credit cost of 2.5% to 3% which we have maintained before the cycle as well, and will we also build some on the credit card business post just capitalizes.
Good.
I think largely you are absolutely on our assumption because by next year, you know our entire MFI book will be covered under credit guarantee. Right. The maximum credit cost if the environment remain like this, you know, I'm again repeating, if the environment remain like this where the MFI having a cost of 7-8%, then our credit cost should not be above 3- 3.5%. Of course, the credit card business also by that time will be in better shape. It depends on these two variables also to achieve 1.8% kind of ROE.
Got it. Secondly, in terms of the credit cost guidance which we gave, we increased the guidance this quarter. Does this credit cost eventually account for bucket movement or fresh stress which is still there in the system? I wanted to understand if a PCR will move up from here on.
No.
It is a mix of both things, right? It is a mix of always, it is a bucket movement as well as it is coming from the, you know, unsecured piece.
Right.
The credit cost, the collection efficiency dip that you're seeing, Pritesh, in this particular quarter, right, we have given that chart on quarter-on-quarter how the MFI collection has dipped on the zero bucket. What happens is that typically comes in.
Hits you in the next particular quarter.
Right. The slippages from microfinance (MFI) we are expecting to go slightly higher than what.
We were initially envisaging, let's say, a quarter back.
That's partly the reason. Because of this particular quarter, as that happens, obviously we'll have to make some.
Provisions, and that's where the credit cost assumptions have been revised.
Right.
As we said, as Vivek also said, incrementally every month has been better. May has been better than April, June has been better than May, and so far, whatever we have seen in July, it's been much better than June.
Right.
That gives us confidence that hopefully we are nearing the end of the cycle. Rather than further shocks, unless something externally comes up, like what happened with Tamil Nadu in, let's say, last particular quarter or this quarter, the impact came in this quarter to some extent.
Got it. Sorry, just to hop on this a bit, how do you see your PCR shaping from here on? Is it more or less going to be at 65% or does it move towards 70%? We attempted in between the quarters that we go to 70% and it has been coming down or it's been slightly volatile. Where do we see that?
I think PCR is sort of.
It is a function of provisioning policy. Right. I think it will continue to be driven by that and depending on the mix of the GNPA within the asset book. Right. Because your secured book carries lower provision than your unsecured.
Right.
Depending on where the NPAs are coming from, you know, the PCR could vary.
Got it. Okay, okay, thanks so much. Thank you so much.
Thank you. Our next question is from the line of Bhavik Shah from Incred Capital. Please go ahead.
Thanks for the opportunity. Just three questions. First, have you seen any action on the Wheels side incrementally?
Sorry, Bhavik, you're not very audible.
Is it better now?
Yes, comparatively.
Yeah. As in, have we seen yields cracking in the Wheels segment in the fixed rate book, given there is too much liquidity in the system and NBFCs would also be competing? Have we seen any rate actions there?
There is pressure on yield.
Yes, I think if there is liquidity available and no growth happening, then there would be a pressure on yield. Right.
How much do we think will it come off by given 100 bps of repo?
No, no, no.
We haven't seen as of now. I'm seeing for this year, by the end of this year, there might be some pressure on yield. Right. In general, I'm saying it.
Okay, okay. 6% of the book which is floating rate, but it is in the fixed period. What would be the exit of this fixed rate period? Like when will it exit? Second half this year or maybe 2025.
This 6% is largely fixed for this financial year. Typically, you have a three-year period. Some of the loans come in respective years. For this financial year, largely the 6% is at a fixed rate, but the duration prints would be more.
Like 18 months or so. Yeah.
Okay. Any update on the universal bank license?
Yeah, I would say work in progress and I believe that in this current year, the decision should be made. I'm not sure what decision and how, you know. I believe it's already 10 months from our application. I think this calendar year we'll find some kind of decision- making from regulators.
Thanks, sir. Thank you and congrats.
Thank you. Thanks.
Thank you, ladies and gentlemen. We will take that as our last question for today. I would now like to hand the conference over to Mr. Prince Tiwari for closing comments.
Thank you, Darwin. Thank you, everyone, for joining the call today evening. I know there have been five or six bank results, so it's been a tiring evening for all of you. I'll allow everyone to go home. If you have anything residual, do reach out to the IR team. Happy to answer all your questions.
Thank you so much.
Thank you. This brings the conference call to an end. On behalf of AU Small Finance Bank, we thank you all for joining us. You may now disconnect your lines.