Ladies and gentlemen, good day and welcome to AU Small Finance Bank Q2 FY23 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. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Aseem Pant from IR team. Thank you, and over to you, sir.
Thanks, Faizan. Good day to everyone, and welcome to AU Bank earnings call for the second quarter of FY 2023. We thank you all for joining the call, and we hope you are well. As usual, for approximately the first 30 minutes of the call, we will have brief remarks by few members of our senior management, followed by 30-45 minutes of Q&A. Firstly, we will have our MD and CEO, Mr. Sanjay Agarwal, share his thoughts on the performance and overall outlook for the bank. He will be followed by our ED, Mr. Uttam Tibrewal, who will share his thoughts on the assets and liabilities performance. Finally, we will have Mr. Gaurav Jain, head of tech initiatives and distribution strategy, who will talk about our progress in digital initiatives.
Besides them, we will also have few other members of our senior management to answer any other questions you might have. For the benefit of everyone, we would humbly request that the number of questions per participant be restricted to two and to join back in queue or mail us in case you have any further questions. We'd also like to take this opportunity to announce that our third AU Insight session is scheduled for the third of November and will be held virtually. We will share further details in due course, and we look forward to your participation. With that, I will request our MD and CEO, Mr. Sanjay Agarwal, to share his thoughts on the bank's performance and outlook.
Thank you, Aseem. Good evening, everyone. Namaskar. Thank you for joining in. Hope you are doing well. To begin with, I just want to wish everyone a very happy Diwali and very happy festive season. This quarter makes us 22 quarters old in our journey of banking, and I'm amazed to see the progress that we are making as a team. In these five and a half years, we have been strengthening our foundation for building a scalable and a sustainable bank, and we are on course, of course. We have managed to grow the bank to a net worth of more than INR 10,000 crores, and both asset and deposits have crossed that critical milestone of INR 50,000 crores while serving 30 lakh-plus customers.
I would like to express myself that each passing quarter increases our confidence that we are on the right path, going the right way with right purpose, right strategy and right attitude. I'm very excited about the road ahead of us as the banking system will see tremendous opportunities in the incoming decade as India prepares to become $5 trillion economy. In terms of macro, global economic activity has been slowing down due to the adverse impact of geopolitical tensions, tightening global financial conditions, persistently high inflation and sharper than expected monetary tightening by central banks globally. Consequently, India too is facing intensified pressure due to the global interest rate trends, weakening global demand and high volatility in portfolio flows. Despite these headwinds, India has emerged as a bright spot with GDP expected to grow 7% this fiscal.
I'm very hopeful about the decade ahead as India stands to benefit immensely from the tailwinds of reforms implemented over recent years, favorable demographics, ongoing digital revolution and realignment of global supply chains. Based on the recent data, banking system credit growth looks healthy at 16.4 year-on-year, and we continue to see growth in digital transmission too. Notably, uncertainty over rates and liquidity has risen significantly in recent months, while inflation still remains above the comfort zone of policymakers. Coming to the AU. The last quarter was among the best quarter as a bank where we got most of the things right. We have launched 37 touch points in this quarter. We grew our deposits by 49% year-on-year. Our CASA ratio reached 42%, and CASA plus retail deposits mix reached 72%. Our cost of money was 5.78 for 6-month period.
I would like to congratulate the team for doing such a wonderful job of raising the deposits during the quarter without any increase in our deposit rates. The credit market also saw good pickup with festive season coming a bit early this year. The asset business saw disbursement of INR 9,200 crore, growing 68% year-on-year, and disbursement fees continue to see improvement. Similarly, the collection efficiency and asset quality continue to hold with average collection efficiency at 108% for the quarter and gross NPA coming at 1.9 and net NPA at 0.56. Our asset quality, which is one of our core strengths, has remained resilient across cycles, and we are committed to maintaining pristine asset quality.
The pandemic days reinforced our faith in our customer segment, and we are convinced that we are serving the right customer segment. In fact, the asset quality of post-pandemic book is even better. 77% of our book was originated post-pandemic, where gross NPL is around 0.55%. Meanwhile, our balance sheet size grew by 46% year-on-year, net worth grew by 49% year-on-year, and our capital adequacy is around 23.4%. In August, we raised capital of INR 2,500 crore with INR 2,000 crore of Tier 1 and INR 500 crore of Tier 2 bonds. QIP was launched amid challenging market conditions. I am overwhelmed by the support that we received from all the participants. I would like to convey my heartfelt gratitude to everyone who supported us. Thank you so much.
This has enabled us to further strengthen our balance sheet and allow us to continue investing for the future. Notably, this quarter also we got the upgrade from the third rating agency, so now we are AA Stable by all three, CRISIL, India Ratings and Research, and CARE Ratings. Thank you so much. Our margin for the quarter expanded at 6.2% from 5.9% quarter-over-quarter. Profit rose by 23% to INR 343 crore with ROA of 1.8% and ROE at 15.3% despite a higher capital base in quarter two. This makes our business model very sustainable. We've always been a customer-centric bank built on first principle of simplifying banking with a strong focus on delivering customer delight.
I'm happy to say that we have added over 3.4 lakh customers to the AU family in the last quarter. Our brand campaign, Badlaav Humse Hai, is forging our reach. More on product has finally to be covered by Uttam. Other than our tech-led business, we further our customer convenience. I'm very happy that we are credit card, Video Banking, UPI QR, and AU digital team are shaping up to stitch together our tech priorities. We continue to invest in our tech-led businesses. Simultaneously, we are keeping a close eye on the tech infra to run the bank where cybersecurity is an important priority too. Bharat will cover this in further detail. In our sustainable journey of building the bank, robust governance mechanism has been the backbone of our growth since the beginning.
I would like to say that the reappointment of Verma Sir, the chairman, has been recommended by the board and has been sent to RBI for approval. Two of our veteran board members, Mr. Rathi Sir and Mr. Narang, are due for retirement in March 2023 after a long, fruitful, and very impactful inning at AU, for which we are deeply grateful. The board will be joined by more independent directors in times to come. We have built a strong leadership team at various levels and continue to invest in them while attrition remains a challenge. AU structure has further allowed us to attract talent and facilitate our leaders with ample space to express themselves and build cohesive and motivated team, which also helps in succession planning.
We are increasingly becoming an employer of choice and continue to do more every quarter on our employee engagement propositions. The journey of last five and a half years has cultured us towards pursuing holistic growth and development. We are working on every aspect which makes us more purposeful, from focusing on ESG to embracing diversity, from furthering financial inclusion to building a digital first, which I think is a great equalizer for all of us. Furthermore, the way we have grown in last five and a half years has given us hope that we will be able to manage the current uncertain environment and navigate through the unknowns. I would also like to share with you our key learnings from last 12 trading quarters as a bank.
First of all, we strongly believe that this platform is a public good, which we deeply respect and are building carefully. We are imbibing the key principles of banking of samjhdari, zimmedari, and imandari every day wise. We are not working with a quarter-to-quarter mentality, instead focusing on the long-term horizon which is required to build a bank of substance and predictability. Governance is first, always first. We are putting in place robust mechanism to manage our risk, which has made us more sustainable and trustworthy. More importantly, we are ready for short-term pains for long-term gains. We try not to heed to short-term noises for long-term voice. The way forward, in my opinion, the journey of AU for next five years will be more exciting as we are.
We not only implement the learnings from these early years but also benefit from newer growth opportunities. We are giving impetus on scaling the current account channel and focusing on SMF, small and marginal farmers lending. To cater a growing demand of wealth products in the coming times, we are building our wealth management vertical. We have also decided to add ICICI Lombard as our newest bancassurance partner. I welcome them. The way the regulatory landscape has evolved in last six months around digital and cryptocurrency will only benefit the banking industry. Recently, the regulator also has allowed SFB to apply for AD-1 license as a scheduled commercial bank, and we are evaluating both as it will be a significant boost to our platform. In the near term, we navigate this uncertain environment.
We continue to remain focused on executing our strategy, leveraging our strength of understanding the borrower's cash flow, and assessing their business resilience amid challenging landscape. The current environment is not as severe as the pandemic, but we are keeping a close eye on the evolving situation, and we calibrate our approach accordingly to grow in a sustainable manner. Specifically, we'll be prioritizing optimizing our cost of funds, consolidating our deposit franchise, covering our risk-adjusted yield, and continue to our growth positive and sustainable way. Overall, I can assure you that as a, as in the past, in everything we do at the bank, the endeavor is to build a highly sustainable and credible bank which is predictable, consistent.
In cricket energy terms, which is near to my heart, we have managed to bat well in the initial overs despite some initial swing and free moments, and we are now in the middle overs, where the team needs to consolidate the innings to play long and to build a credible score. In the end, I am very thankful to all stakeholders, government, our regulators, our board, our customers, our investors, the analyst community, my team, and all the unsung heroes for supporting and believing in us. Thank you so much, and hand over to Uttam for the operational highlights. Thank you so much.
Pleasure. Thank you, Sanjay. Namaskar and good evening, everyone. We are in the season of festivities, and I hope that the auspiciousness of this period rubs off on all of us.
I wish you and your loved ones a very happy Diwali and prosperous new year.
Over the last 5.5 years as AU Small Finance Bank, we have charted our course carefully. I'm happy to share that in Q2 FY23, we continue to deliver a consistent business growth while keeping our margins intact. As Sanjay said, the focus is to implement the learnings of our years as a bank. To maintain our credit filters and quality of book, focus on granular customer acquisition, customer engagement, cross-sell, and CASA growth. We continue to be optimistic about opportunities and align our strength for keeping our market position intact. To start with, I would like to cover some key operational highlights for the quarter. In line with building a diversified presence, the bank has made deeper inroads with 27 new touchpoints added this quarter, out of which 15 are liability branches. Eight of them being in our emerging markets in UP, South and East India.
With a view to bolster customer acquisition in urban markets, 13 of the 15 liability branches are located in metro cities like Chennai, Bengaluru, Hyderabad, Kolkata, etc. Maintaining our pace from the first quarter, we have expanded our deposit book by 7% in this quarter and increased our CASA ratio from 39% to 42% on a quarter-on-quarter basis. Similarly, our CASA plus retail CD mix now contributes 73% of total deposits. CASA deposits have grown 109% year-on-year and 16% quarter-on-quarter. Against our reported increase of 190 basis points, our incremental cost of funds increased by 70 basis points during H1 FY 2023, and our overall cost reduced by 17 basis points during the same period.
After avoiding raising rates for entire of last quarter, with effect from 10th October 2022, we have increased the FD rates by up to 60 basis points for retail deposits, taking our peak rate to 7.5% for regular customers and 8% for senior citizens. With this hike, the bank is offering one of the most competitive FD interest rates, thereby providing an opportunity to customers, particularly senior citizens, to get inflation-beating returns from their fixed deposits. We have been focusing on improving the product mix and cross-sell to our customers with an aim to increase average balances. Our product per customer has reached 1.64 payment accounts customers and 1.97 for current account customers, excluding government and BSBD accounts.
Our cross-sell efforts including disbursing 10,000+ life insurance policies, adding 8,600+ 3-in-1 Savings Accounts, and adding 12,000+ mutual fund SIPs during Q2 FY 2023. Additionally, during the quarter, we disbursed INR 728 crore via cross-selling of asset products to our branch banking customers, a growth of 64% quarter-on-quarter. Another key aspect of our branch banking strategy is sourcing of quality customers and adding in the last quarter, 66% of all savings accounts sourced by branch sales team, excluding salary accounts, were from premium category of Royale and Platinum accounts, up from 59% in Q1. We have just launched our newest product for our current account customers called AU Platinum Business Account.
This is a premium product with industry-leading features designed to provide a lot of flexibility to our small business customers with plug-and-play features around cash, QR codes, digital solutions and pricing. This will provide added momentum to our current account journey, where 37% of our CASA customers already hold high-value variant of our current accounts. Our digital initiatives, AU 0101 app, video banking, credit cards, and UPI QR, have played an important part in improving customer experience and engagement. On savings accounts, our transacting customers have increased to 56% with an average of 28 transactions in a month. Further, across 72% of the current account customers were active on internet and mobile banking in Q2. This reflects the shifting preference of customers for primary banking behavior.
Another engagement tool, AU Shopping Dhamaka, is now in its fourth edition and is currently live with very attractive offers across platforms for this festive season, helping us engage more with our customers. Moving to our asset side views, let me start by updating you on our Wheels business. As an industry, vehicle sales in Q2 FY 2023 has grown by 16% year-on-year, with most segments displaying major growth, particularly the passenger and commercial vehicle segments. Our average ticket size around INR 5 lakhs on disbursements and it is INR 2.6 lakhs at portfolio level, excluding two-wheelers. This quarter, we disbursed INR 3,542 crores with an IRR of 14.29%, which was an increase of 35 basis points sequentially. This also illustrates the ability and strength of our business model to cushion price volatility.
I'm pleased to share that as of 30th September 2022, the Wheels portfolio hit a milestone of INR 20,000 crore. Through 7.81 lakh live loans comprising of 53% new vehicles, 35% used and refinance, 10% tractors and 2% two-wheelers. Out of this, INR 16,000 crore is contributed by the new book generated post April 2020, which continues to display robust asset quality at GNPA of 0.65% in line with our expectations. Overall collection efficiency for Wheels business was 107% for the quarter. This also led to improvement in GNPA to 2.24% from 2.30% sequentially and from 4.31% a year ago. Moving on to secured business loans.
As on 30 September 2022, our SBL portfolio stands at INR 17,471 crore with a weighted IRR of 15%, growing 22% year-on-year. We have 1.74 lakh unique customers with a GNPA of 2.8% as on 30 September. This quarter, we added 12,000+ customers with 76% new to bank with an average ticket size of INR 11.2 lakh for a total disbursement of INR 1,459 crore, which had increased 49% year-on-year and 14% quarter-on-quarter. Collection efficiency for SBL business continues to be robust at 112%. Moving on to the older but newest kid on the block, our home loans SBU.
Currently operates out of our eight major states, and our total HL portfolio was INR 3,365 crores as on 30th September 2022, a growth of 12% quarter-on-quarter. Our disbursement in Q2 FY23 was INR 498 crores, comprising of approx 34,000 loans with an average ticket size of around INR 300 lakhs. Our GNPA on this portfolio continues to be stable at 0.44%. Notably, being an affordable housing book, much of our book is also eligible for long-term refinance from NHB. Geographically, we have seen greater demand from both urban and semi-urban rural areas, which remains strong with the onset of the festive season. Commercial banking is a franchise business which we started on the banking platform, and our two main product lines under this are business banking and agri banking.
On business banking, the portfolio has reached INR 3,837 crores as on 30th September, a growth of 18% quarter-on-quarter, with disbursement of INR 938 crores during the quarter. Further, the portfolio is 98.5% current and GNPA was reduced to 0.17% on September 30, 2022, from 0.34% as on 30th September 2021. Agri banking business has reached INR 3,000 crore portfolio mark and is growing with stable asset quality. This quarter, we saw an incremental disbursement of INR 486 crores due to several conducive factors, including growing our footprints in newer geographies. New product initiatives like financing to FPOs, which is Farmer Producer Organizations, have started contributing to the small and marginal farmer book of the bank.
Summing up, we are in the rising interest rate where inflation is proving to be more resilient than initially estimated. We shall continue to monitor our competitiveness and calibrate deposit rates accordingly, with focus remain on garnering low cost CASA and retail deposits. The festive season has historically accounted for good business in second half of any financial year, and we are witnessing increased demand across most of the business segments this year as well. We continue to focus on growing our asset business sustainably with yield optimization and keeping our credit filters intact. While we are bullish on India, we are conscious to not get carried away by return of the credit demand post the two years of pandemic.
Till we ascertain if this is set up or a sustainable demand, we will continue to focus on our strength and reinforce processes and to prepare for the next decade of India, yet being watchful of the demand situation. As always, we remain highly engaged with customers on ground to gauge demand and dynamically calibrate and optimize ourselves. I remain confident that our business model and execution capabilities, optimistic about the opportunities and potential, and yet watchful. I look forward to sharing more with you in the coming quarters. I now invite Gaurav to share his thoughts on our different initiatives. Thank you and take good care.
Thank you, Uttam. Good evening, everyone. I will now provide an update on our tech initiatives including credit cards and UPI QR. Tech remains an area of key focus for the bank, and we continue to execute on our tech strategy with the objective of growing our deposit franchise, developing unsecured lending capability, and building out our digital distribution. We soft launched AU 0101 in June 2021, and did a full commercial launch in August 2021 in the middle of the pandemic. Since then, our digital capabilities and key metrics have progressed significantly. I'll take a moment to talk about three key highlights around digital adoption, acquisition, and engagement. First, on digital adoption. Our digital adoption is 3x of June 2021 levels, with 14 lakh digital customers, of which 8 lakh are monthly active.
98% of transactions and 90% of service requests are being executed digitally. Second, on digital acquisition. Customer acquisition through digital products has increased significantly, accounting for 42% of total customer acquisition in Q2 versus 0% in June 2021. Since the launch, we have opened over 2 lakh accounts using Video Banking, issued over 3 lakh Credit Cards, disbursed over INR 500 crore of digital Personal Loans, and installed over 8 lakh UPI QR. Digital acquisition is also helping us lower our costs of acquisition. For example, digital savings accounts were acquired at 50% lower cost of acquisition compared to our branch channel. These digital savings accounts accounted for 38% of total savings accounts acquisition in Q2. Third, on digital engagement. Our digital proposition has also increased our customer engagement meaningfully.
We have extended pre-approved offers to over 1.5 million customers since June 2021, of which over 2 lakh customers took up the offer. Monthly transacting customers as a proportion of total savings account customers has increased from 47% to 56%, and average monthly transactions per transacting customer has increased from 17 to 28, an increase of 65%. I will now give a brief overview of our three digital units. First, video banking. Video banking as a distribution and service channel continues to improve with the aim of making 0101 plus video banking a complete replacement of a branch.
In Q2, Video Banking team opened over 50,000 savings accounts, received around 80,000 servicing and engagement calls, and increased total relationship value of digitally sourced savings account customers to INR 870 crore, an increase of 21% quarter-on-quarter. Average relationship value of a digital savings account customer stands at over INR 40,000. Combination of Video Banking and AU 0101 is also driving reduction in branch visits, with propensity of digital savings account customers to visit branches being one-third as compared with customers acquired through branches. Moving over to Credit Cards. We issued over 90,000 Credit Cards in Q2 and crossed INR 500 crore of monthly spend in September. Our Credit Card proposition is helping us attract new-to-bank customers, with 47% of total cards being issued to new customers.
We continue to innovate with new product launches, with India's first customizable credit card, which was launched in last quarter, continues to be very well received in the market and is now our highest selling card variant. Our key credit card metrics are in line or better than industry average, with 86% of our customers having activated their cards and 53% customers being thirty-day purchase active. Now, a brief update on our merchant solutions business. During the quarter, we installed 1.5 lakh UPI QR, taking our installed base to 8.1 lakhs. With over 1.5 lakh daily transactions, UPI QR continues to help us drive engagement and deepening of our merchant customers. 85% of transactions by value were credited to linked AU CASA accounts. This has helped increase average monthly balances by 83% post UPI QR install.
We are also cautiously building out our digital unsecured lending program for merchants. Total unsecured loan disbursement to merchants amounted to INR 86 crore. In addition to customer-facing digital initiatives, which I just spoke about, we are also investing in a number of areas around digitization, core technology stack, and cybersecurity. Some of these key projects include upgrade of our core banking platform, which we expect to go live in the next few months. Implementation of data platform, which would unify all of bank's data in one place and enable development of next level of analytics capability in the bank. Implementation of a new loan origination system for Wheels business on the Salesforce platform. This would better equip our Wheels team to faster onboarding of customers.
Finally, our cloud migration project, which would be an ongoing initiative for next couple of years and include both migration of selected existing applications to cloud, as well as onboarding new applications on cloud. To conclude, Q2 was another quarter of solid execution, and we continue to progress in our digital journey. With this, I'll now hand over to our team for Q&A.
Thanks, Gaurav. Faizan, we can start the Q&A.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The first question is from the line of Rajniesh from ICICI. Please go ahead.
Yeah. Hi. Hi, sir. Congratulations on numbers. One number, you know, it's
Sir, your audio is breaking from your line. Please check.
Is it better now?
Still the audio is breaking, sir.
Is it?
Sir, still the audio is breaking. Request you to be in a network area.
Hello?
Yes, sir. Please proceed with your question.
Yeah. Yeah. Hi, sir. sir, just couple of question. One is on the disbursement number, so which is, has been stagnated around INR 8,000 crore from last couple of quarters. When we look at the sequential growth in the Wheels and the SBL portfolio, which is almost 70%+ of our portfolio, is around 2% growth. Sir, what is happening on the disbursement side? I mean, why it is being stagnant? Particularly within the segments, why Wheels and SBL is still sort of showing the muted growth?
We don't think that our business disbursement are stagnant, you know, because we have one yearly plan in place, and by that numbers, you know, we are growing every quarter. Of course, Wheels and SBL, both businesses have some size, and we have grown so much well in last five years. We just want to take the whole risk management and the whole controls and all those things to really see that we don't build a wrong book in a good time, right?
I think we are absolutely on track because we have not many books to offer, right? We do Wheels, we do SBL, we do Home Loans, we do Commercial Banking, Credit Cards. We need to figure out, and that's why we started all those different products so that we have a very balanced growth, right?
Right.
I think we are absolutely on course of the yearly numbers. I would say that generally in first six months, we do around 40-45% of business, right?
Mm-hmm.
In that sense, you know, I would say you will see not much growth happening in the next six months. In comparison, right? In comparison.
Got it. Yeah, yeah.
Yeah. Yeah.
Okay.
That's the franchise we really want to build where, you know, every project want to contribute in the journey of growth.
Got it, sir.
Yeah.
Sir, secondly, on the business banking and Agri SME, you know, this book has been growing at a pretty faster clip from last 6-7 quarters. If you can just throw some light in terms of, let's say, the tenure and the kind of customer segments where we operate. Because when we look at the yield on the business banking, it is around 10-10.5%. I would say it is one notch below than what leading private sector banks are tapping. Maybe if you can just throw some light on the customer segment and the latest, maybe the collection trend or any data point which you can highlight.
Yeah, Vivek here. Both business banking and agriculture banking, both are primarily working capital book. The average ticket size are, you know, for both vertical ranges from INR 80 lakhs to INR 1 crore kind of a thing, right?
Mm-hmm.
It has different fund-based and non-fund-based. It's a very pretty normal working capital business where, you know, most of the facilities are renewable every one year. It has a smaller component of, you know, CapEx loans, which typically are, you know, down payment sort of expansion or some equipment or machinery purchase kind of a good thing.
Okay.
Broadly, it's a business where we also get a lot of you know cross-sell opportunities with the same customer base, has good amount of deposits from these same customers, right? As far as the yield is concerned, it is you know we have to look at from the spread perspective because these are low-touch businesses as well, right?
Mm-hmm.
You know, just want to add on your, like, you know, these are not one notch below the other private sector bank customers because you know that a lot of formalization has happened after GST last five years.
Okay.
Here also we are using our distribution, right? Because, you know, we are more dominating in the core, which is the semi-urban, rural area.
Urban. Yeah.
There also, we have seen a lot more formalization happen. People didn't have any kind of leverage on their balance sheet, but in the last five years, the business has come, everything on the formal side.
Mm-hmm.
They require tax credit and all those things, so and we are able to price the risk, and we are able to actually price our positioning as a franchise.
Mm.
I would say that again, I won't say that it's below the level of any private sector bank because our net NPA in business banking book is around 0.16, right, as a rate of 10%.
Yeah, yeah.
I'm very comfortable in this kind of positioning, and I strongly believe that India in MSME and SME, the next decade, you know, will do wonders.
Got it.
Yeah.
Sir, is there any geographical, let's say concentration, maybe business banking, Agri SME, Rajasthan, outside Rajasthan? If you can give some data point around that.
Typically our SME business are distributed, you know, between Rajasthan, MP, Delhi NCR, Punjab, Haryana, you know, Gujarat and Maharashtra. That is where-
Hmm.
It is spread out. These geographies are, you know, very new and wherever the branch banking business, this business would need a branch category. Wherever the branch banking franchises would present, these business
Hmm.
would follow the suit.
Okay.
Let me just give you two points.
Yeah.
Two points. On the first question, you have to also understand we also securitized about INR 700 odd crore during the quarter from the Wheels business.
Correct.
That will also impact the advance growth as well. As far as what Vivek ji said that, you know, the entire business banking, agri banking geographically, it will be very similar to the broader overall book.
Yeah. That's what I just wanted to reconfirm. Okay.
Okay.
That's it, sir. Thank you. Thank you very much, sir.
Thank you. The next question is from the line of Ritik Gupta from Guardian Asset Management. Please go ahead.
Sir, we have deductions during the period of approximately INR 234 crores. I just wanted to understand how much will be the write-offs or the recoveries from this, if you have the data.
This data has been given on slide number 26. We have done a INR 23 crore write-off.
INR 23 crore write-off. Okay. I wanted to understand if we have a deposit rate being fixed and with the increase in repo rate we still don't see a cost of fund not at that increased level. How I just wanted to understand the picture of it. How is the incremental cost of fund going down when the repo rate has been increased?
No, no. Incremental cost of fund hasn't gone down, right? Incremental cost of funds have gone up by-
No, total cost of funds, I meant.
The total cost of fund, there is a base effect, right? There is an AUM, and the overall cost has been coming down for us if you look at the last two years.
Prior to pandemic, we were at about 7.5%. Last full year, the cost of funds were about 5.95-ish%. An incremental cost of fund, if you see, we started the year at about 5.3%. To that extent, it has just been a mathematical adjustment.
Okay.
A lot of old money is still there, right? Because of that, my cost is coming down. If you will see when we started our year, we started from around 5.65%, which is now 5.80%. In six months, our overall cost had increased, but still since we have low cost old money in system, that is why my overall cost is still 17 basis points below than what it was in last year.
Okay. Got it, sir. Yeah. Thank you.
Thank you. The next question is from the line of Prabal from Ambit Capital. Please go ahead.
Thank you. Congrats on the good numbers. Also my question is on the current deposits. Very strong growth sequentially month-on-month. If you see the monthly growth in the balances as well, that is also very strong. Just want to understand what is driving this, the increase in the balances per customer or we are also able to see mobilization of more customer deposits?
Yeah. Rishi Dhariwal here. We continue to acquire, you know, customers in our Royale and Platinum offering products, right? Which is what is finding good traction with customers. The second is that we have increased our branches in urban markets by almost 130 branches over the last two years. Which is what is helping us to reach out to customers in newer geographies. The expanded distribution adds to, you know, our ability to source more and more savings accounts. The third is that, you know, the savings customer and the deposit customer are, you know, two very, I mean, they are two different groups of people. There are different groups of people who typically keep money in savings.
The customer who typically book deposits are the ones who are senior citizens and, you know, people who want to save money for a slightly longer term. We have been able to sort of ramp up our savings account acquisition and which is what is showing, you know, the growth in savings.
What would be our cost of current deposits, if you have the number?
It's 5.5%.
5.5. Okay. Sir, and a question on OpEx. We have seen employees reduced, whereas our employee cost has gone up, I think, 15% Q-o-Q. What explains this?
Sorry to interrupt you, Mr. Prabal. The audio is not clear from your line. Can you check and call us please?
Prabal, the question was that we have seen reduction in employees, whereas the employee cost has gone up about 15% Q-o-Q. What can explain that?
Obviously, you know, employee cost is more a function of, you know, there's the annual appraisals and those things happen. Predominantly for us, it happens in Q2. That would be part of the reason. But nothing extraordinary there. Of course, in terms of overall capacity addition point of view, we had some excess capacity during the COVID days. Because of that, we have obviously been looking at focusing a lot on productivity and rationalizing some of those manpower, looking at the overall environment. Then inflation has always played a role, right? Because the appraisals typically would follow in this quarter. Given the inflation that's happening, given the entire talent crunch that's happening across, you would see a natural cost increase. That's what it is. Nothing else to read into it.
Prabal, Vimal here.
Sure.
In addition to that, actually you are comparing the cut-off date numbers. Whereas total cost paid for the employees is around INR 700 more than average of the last quarter. That's why the cost is increased. Closing number is a 1,200 number. In average it was INR 700 more than last year's quarter, last quarter.
Okay. Is it fair to say that INR 450 crore number is now sustainable and can improve quarter-on-quarter from here onwards?
No. What we are saying is that ultimately, see, the employee wage bill would typically follow the inflation cycle and the way the entire employee base is gonna grow. What Vimal just mentioned, that the reduction in the employee base has happened towards the quarter-end number that you are seeing. If this sustains going forward, then obviously you'll see some amount of impact. But in case, depending on the business environment, requirement and how the overall environment shapes up, if we decide to further increase our hiring, then we'll obviously that will also have an impact, right? We'll have to see how we go along.
Right. On the other topics, so any target on the cost to income here? Because now that is almost around-
4.5%. 4.6%-4.5% for investment.
Sorry to interrupt you, Mr. Prabal. Please speak in headset mode. The audio is not clear from your line.
We don't really look at cost to income.
Prabal, if I understood your question, cost to assets is typically something that we don't track. We track cost to income ratios, which we have already talked about in the presentation and also given a guidance and touched upon in MD's speech. It's definitely outside of our comfort zone, and we are working on it, and you see there has been a reduction quarter-on-quarter. We'll continue to do our best to bring it down to our guidance range of about 62 odd %.
Right. This 62 odd percent would be because of the improvement in income and not because of the reduction in the cost for the investment that you are receiving.
No, both actually, because in the first quarter also, if you see, there was an impact on the income, right?
Right. Okay. Thank you, sir. All the best.
Thank you. Thank you.
Thank you. The next question is from the line of Anusha Raheja from Dalal & Broacha. Please go ahead.
Yeah, thanks for taking my question. Just want to understand, you know, over the next 2-3 years, you know.
I'm sorry to interrupt you, ma'am. The audio is very low from your line.
Yeah. Am I audible now?
Yes, please go ahead.
Yeah. I'm saying over the next 2-3 years, when you feel that operating leverage will kick in and you will have material, you know, reduction in the cost to income ratios?
I think I'm Sanjay Agarwal. Again, you know that there are, there were so many unknowns in last two to three years, right? Due to pandemic, and now also you're seeing lot more uncertainty around the future growth. We as a bank need to always capitalize ourselves to really sustain, right? If you ask me whether we'll have an operating leverage in two to three years, I would say let's give us another 2-5 years, right? Because in that timeframe, you know, we'll have a sizable business in place. You know, there will be more loans in place. I think I would say not in two years, but maybe in two to five years you will see operating leverage helping us to build a better ROE.
I mean, definitely you are in an investment phase currently, and that's, you know, that's positive. Any number to put up, you know, over the next three years, you know, what, you know, internal, number that you're looking at or, any, ballpark number to put there?
Give us some more time, you know, because it's difficult to predict as of now because of this continued inflation. You know, we are into investment phase. You know, our credit card business, retail banking business, the whole tech business is coming up to a size and shape. I think it's difficult to predict, to be honest. We are not off course. You know, we are not running a very high cost around it. If you take our investment cost out, we are around 55-56%, right? I would say that, you know, next two to five years we'll have some kind of operating leverage there, but it's difficult to put a number around it as of now.
Okay. Thank you, sir.
Thank you. Participants, to ask a question, you may press star and one. The next question is from the line of Dhaval from DSP Mutual Fund. Please go ahead.
Yeah. Hi. Congratulations on good set of numbers. I just had one question relating to the PSLC income. You know, in general, like for the first half, we've seen a very low number. Could you just comment what is driving this you know, run rate and if you could give some perspective for second half of the year?
Yeah. Hi, Dhaval. Yogesh Jain. PSLC is just, I think, market factor, and every quarter we see market, how market is behaving, what are the rates premium available. If you will see second quarter, premiums were very muted. Micro and general were actually on two paisa, one paisa. We decided that and we'll see next quarter. We have PSLC potentially available. Since rates were not there, we will figure out in next quarter. As we mentioned in our presentation that we securitize some of our portfolio to get some rate advantage. We will balance between PSLC and securitization going forward also.
Understood. The second half should be typically, you know, like, significantly better than the first half in terms of PSLC?
There is no pattern or benchmark because only a second quarter, so there is no benchmark. We'll see each quarter and then accordingly we'll figure out.
Understood. Okay, thanks. All the best.
Thanks, Dhaval.
Thank you. The next question is from the line of Darpan Shah from Haitong India. Please go ahead.
Yeah. Thanks for the opportunity and many congrats on the call today. My first question is on growth. You know, while we are talking about uncertain times and, you know, in key measures also you have mentioned that, you know, you want to consolidate your deposit franchise, you know, figure the yield. Should we assume that, you know, growth will be slower in the next couple of years or-
I'm sorry to interrupt you. The audio is not clear from your line, sir. Please use-
I'll just repeat the concern about it. My question is towards growth. You know, while you are talking about uncertain times and, you know, preserving our NIMs and consolidating deposit franchise, should one assume that even the loan growth from here on will moderate or will still continue the way we have seen, you know, in the previous years?
No. I would say that, you know, that's why we call it uncertain time because we are not able to predict. There are certain headwinds like inflation, interest rate risk, liquidity, right? You know that our asset growth is driven by the deposit growth. You know, we can't grow asset on its own, right? Deposit is pricey now. We don't want to raise money at any cost and want to lend it at any kind of, you know, rate. We really want to protect our NIMs and our ROE and ROA. That is why we are saying that we want to really see how the growth happens. You know, it has to be profitable. It has to have some kind of numbers around it, right?
You know, as I told you that, you know, generally we do 40%-45% of business in first quarter. That makes a very healthy growth rate in this year itself. There is a demand. You know, we just don't want to rush ourselves because, you know, I strongly believe from my experience of 25-26 years that bad books are built in good times, you know. That we don't want to do anything like that. There is growth, but we don't want to say that, you know, we really want to grow out of that, right? That's our positioning, but we are growing well and we believe that any sustainable, reasonable growth can be manageable and sustainable.
Okay, great. Thanks for that. Just one last data-driven question. You know how much was the slippages from the restructured book during the quarter?
That was INR 58 crore. INR 58 crore.
Okay, great. Thanks a lot, sir. All the best.
Thank you.
The next question is from the line of Nilanjan Karfa from Nomura. Please go ahead.
Hi. Thank you. I hope I'm audible. There's two set of questions. I mean, it just seems to me you are being a little more cautious. You know, quite a few times, we heard, you know, building bad book during good times. It is a fair comment. Therefore, you know, trying to get a context of what kind of growth are you actually looking at for this year and maybe in the next year as well?
We believe in like, you know, generally we do 40-45% of business in H1, and that makes us around 12-13% growth itself. You know, we have already delivered, right? If you mathematically calculate it, you know, it will be around 27-28% kind of growth this year. You know, my point is not that we don't want to grow and that aspect, you know, anything around 27-28% even 30% is good enough. You know, the idea is to really grow at some kind of strategy, you know, because we can't raise money at any cost and we just don't want to lend it at lower rates, right?
We really want to protect our NIMs, our ROA, and that is we are saying that there is enough demand available, but demand has to be profitable for us. You know, in past, you know, we have done that. You know, even in my NBFC days, there was a good time, but we never ever gone to the market demand, right? We always try to build our own strategy and work upon those lines, right? My sense is that we are on right course. We have a very long-term vision to build this bank. We need to see the cycles. You know, the team need to understand, we need to hold on, you know, and see through every up and downs of a bank journey to really become a more long-term franchise, right?
Which makes you very sustainable and predictable.
Sure, sir. If I can just, you know, kind of, extend the question. I mean, is there something in the environment that you are a little worried about? Maybe that's the question I wanted to ask.
Like, you know, in my opinion, if inflation remains like this, right? There is an elevated interest rates, right? Then it will eat up your wallet, right? How the people will pay their EMIs?
Mm.
You know, if suddenly, you know, the crude goes up to $120-$130 a barrel, right? What should we do? Because we are running a vehicle book. We are running an HBL book, right?
Right.
We need to be cognizant of the fact that, you know, how inflation remains for next six months. You know, the policymakers are doing their best. You know, the demand is like this. You know what I want to say is that why really want to overgrow? You know, let's grow sustainably. If when you have a lot much demand, you can pick and choose, right? What we are doing that and in that, you know, we really want to calibrate ourselves. You know, let's price our risk. Let's understand customer more. You know, let's see that, you know, even on a high inflation, high interest rate cycle, whether it's okay to pay EMIs, right? In that kind of understanding we are building internally.
Perfect, sir. This is very helpful. The second question is, I don't know if you will be able to share. In the fourth quarter we did that, you know, the OpEx movement between 2021 and 2022, you know, split out between three or four different components. Possible to get it in the first half, how this has moved?
We have given that data.
Okay.
I mean, not in so many words, but the number is definitely there. It's on slide number 15. Around INR 125 crore of the incremental expenses has been towards the investment. The breakup is there on that slide.
Oh, okay. Yeah, yeah.
Similarly, you can find for Q1 in the Q1 presentation.
Sure, sir. Sorry for that. Yeah, thanks. Thanks so much.
Thank you. The next question is from the line of Sarthak, an individual investor. Please go ahead.
Hi, thank you for the opportunity. My question is to Sanjay, sir. Can you give me approximate expense towards the fundraise and what our ROE would have been barring this exceptional item?
Oh, I think specific data, right? You want a specific-
We have already disclosed that. Specific, maybe approximate also would do.
No, no. The exact number is already disclosed in the placement document. That is as per requirements of SEBI. Broadly, it was around 1%, if I remember correctly. Just a tad above 1%.
Okay. Around INR 20 crores, you mean to say, right?
Around, yeah, INR 23 crore.
INR 23 crores.
Yeah.
INR 23 crore, if I remember correctly.
It was better off which we have been account. Yes.
Okay.
Yes.
Okay. My question is to Sanjay, sir. So see, sir, I've been a retail investor. It's very difficult for me to calculate each and every moving item in P&L. I just want to get a sense that what our sustainable ROA would be for like 2-3 years. Then once operating leverage kicks in after 3-5 years. Can you just give me a sense, a number, a range?
I would say that, you know, you have to see our last five-year working. That gives you enough guidance, you know, because we always remain north of 1.7-1.8 ROA, north of 15%. Initially, our journey of last five years, right? Sarthak, you know, to be very honest, you know, there are so many moving items like, you know, how the interest rates will play out. You know, we are rightly investing so much in our digital capabilities. You know, like, pandemic happened. And also there are lots of unknowns which can happen to us in next five years favorably, right? If you ask me specifically, you know, it's difficult for me to comment.
I think last five years' number, data should give you confidence that this franchise is very sustainable because we have figured out the asset franchise, where to lend, what rate we want to lend, what our NPS can be. You know, because what not we have seen in last five years. I think our asset franchise is very solid and very strong. Our deposit franchise in last three years has completely gone through a complete change, you know, from a wholesale franchise to retail franchise. That is also enabling us to manage costs in spite of this inflated rate. Then again, our digital properties are coming up well, you know. I think all put together, you know, I strongly believe that anything what we have achieved in last five years should be gettable, right?
Okay.
Anything can happen better from here.
Wow. Maybe once operating leverage kicks in, 2%+ ROE is also possible, right? 2.2 or 2.3, something like that?
This is the count, but let's hope for the best.
Okay. Maybe I'll take a hint from that. Yeah.
Yeah. Thanks, Sarthak.
Thank you. That's it from my side.
Thank you. Participants, to ask a question, you may press star then one. As there are no further questions from the participants, I now hand the conference over to Mr. Aseem Pant for closing remarks.
Thank you everyone for joining us and for your support. On behalf of the entire AU team, we wish you a happy and healthy Diwali. Please reach out to the IR team for any further questions.
Thank you. Ladies and gentlemen, on behalf of AU Small Finance Bank, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.