Ladies and gentlemen, good day and welcome to the AU Small Finance Bank Q2 FY 2026 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 touch-tone phone. I now hand the conference over to Mr. Prince Tiwari, Head of Investor Relations. Thank you, and over to you, sir.
Thank you, Ruthika. Good evening, everyone, and welcome to AU Small Finance Bank's earnings call for the second quarter of the financial year 2025-2026. Thank you all for joining the call this evening. On today's call, from the management side, we have our Founder, M D and CEO, Mr. Sanjay Agarwal, Executive Director and Deputy CEO, Mr. Uttam Tibrewal, Interim CFO, Mr. Gaurav Jain, Chief Trade Officer, Mr. Vivek Tripathi, and the IR team. We will start today's call with 20-25 minutes of opening remarks by Mr. Gaurav Jain, highlighting the bank's performance, positioning, and outlook. We will follow the opening remarks with another 40- 45 minutes of Q&A from investors and analysts.
For the benefit of all participants and so that we can take everyone's question, we would humbly request everyone to keep the number of questions restricted to two per participant and join back in the queue in case you have further questions. For any data-keeping questions, you may kindly reach out to the IR team at any time post this call. With that, I'll now request Mr. Gaurav Jain, Interim CFO of the bank, to share his opening remarks. Gaurav, over to you.
Thank you, Prince. Good evening, everyone, and thank you for joining the call. It's a pleasure to welcome you all to AU Small Finance Bank's earnings call for the second quarter. We begin by expressing our deepest condolence on the untimely demise of Mr. Vimal Jain, CFO of the bank. Over the last 15 years, Vimal Jain had become one of the strongest pillars of our institution. His vision, leadership, and unwavering commitment played a pivotal role in shaping AU's growth and values. He brought deep financial expertise, clarity of thought, and unwavering integrity to every responsibility he undertook. Humble, approachable, and generous with his time, he had an ability to connect with people, and to many of us, more than a leader, he was a mentor, a guide, and a friend. He has built a strong team of motivated leaders, each one of them being proficient in their field.
His loss is deeply felt across the organization, and on behalf of the entire AU family, we offer our sincere prayers and condolences to his family and relatives and hope to honor his legacy by continuing to move forward and complete his AU forever mission. Q2 marks the completion of 34 quarters of our banking journey and 30 years as a financial franchise. We have often said it takes a decade to lay the foundation of a well-run bank, and with six quarters to go, we are on track. Our journey has been marked with resilience and steady progress, overcoming challenges from macroeconomic cycles, industry crises, asset quality cycles, to once in a century events like the pandemic.
Over the last eight and a half years, we have built a Pan-India liabilities franchise, scaled core asset businesses, maintained strong asset quality, expanded distribution, launched newer products, and focused on talent and succession planning. Strategic moves like relocating to Mumbai and acquiring another bank have strengthened our presence, especially in South India. We have learned from our mistakes and acted quickly, positioning AU to deliver a sustainable and predictable growth beyond 2027. Notably, on August 7th, we received an in-principle approval from the Reserve Bank of India to become a universal bank with an 18-month transition time. This is a strong endorsement of AU's business model, sound governance, and commitment to financial inclusion. We extend our heartfelt gratitude to all stakeholders for their trust and support throughout our 30+ year journey. In recent months, the global economy has remained volatile with shifting trade flows and a more complex, multimodal environment.
Domestically, the banking system credit growth has slowed to 10% versus 16% in FY 2024. However, the policy environment is turning more supportive with CRR cuts, LCR changes, draft circular on reduction in RWAs, and a well-staged ECL implementation plan. These announcements supplement the earlier announced cuts in policy rates by the RBI , as well as income tax and GST cuts by the government. Looking ahead, we expect the broader economic environment to improve in the second half of the year, supported by revival in consumer demand led by GST cuts, above-average monsoon supporting rural growth, and government's continued thrust on CapEx. In this evolving environment, AU continues to deliver resilient performance with H1 profit after tax growth of 6% on a YoY basis. Our deposit book grew by 21% year-on-year, which was nearly 2x of the system growth rate.
Our loan portfolio, excluding unsecured businesses, grew by 22% YoY. Including unsecured, loan growth was at 17%, which is 1.7x of the system credit growth. Margins have started to grow, with net interest margin (NIM) expanding by five bps quarter on quarter to 5.5% compared to 5.4% in Q1, led by a sharp decline in cost of funds. Credit cost has also started to decline and is expected to normalize in the second half. In many ways, Q2 marks the bottoming out of the current cycle, with growth staying strong in core businesses, unsecured book beginning to stabilize, uptake in margins, and commencement of reduction in credit costs. We expect to see tailwinds in the second half from the onset of the festive season, boost from GST cuts, and expected economic recovery.
Over the next two to three years, expansion of distribution in Andhra, Karnataka, Tamil Nadu, Telangana, UP, and West Bengal will start contributing to our growth in a meaningful manner. Moreover, the central and various state governments have instituted a range of credit guarantee schemes and interest subsidy programs to lower the risk exposure of lenders and reduce borrowing costs for targeted groups. The bank has been actively participating in these schemes, ensuring credit delivery and channelization of resources to the end beneficiaries. This, combined with recent reduction in PSL requirements from 75% to 60% for SMBs, would further help in the ease of business for our retail and MSME segments. Now, let me give some color on each of our businesses.
First, on the deposits business, our deposit base crossed [INR 1,032 billion], growing by 21% year-on-year and 3.8% quarter on quarter, reflecting the growing strength of our branch banking franchise. CASA deposits grew by 9.7% year-on-year, and CASA ratio remains stable at 29.4%. Within CASA, current account deposits grew strongly at 26%, and savings deposits grew by 6% YoY. As highlighted earlier, cost of funds reduced by 25 bps during the quarter of 6.83% from 7.08% in Q1. We have started to deprioritize high-interest rate-led deposits, and focus is on increasing granular SAR on the strength of our full suite of products, services, distribution, and client relationships, with interest rate not being the only major differentiating factor.
With effect from the October 3rd , we have cut peak SAR rate by another 25 bps, taking the total SAR rate cut in the highest bucket to 75 bps in this financial year. The highest SAR rate on offer now is 6.5% versus 7.25% in March 2025. For 10 lakhs and lower balances, our peak SAR rate is now down to 3.5%. New acquisition of SAR accounts continues to grow at a global pace, with a 35% year-on-year increase in the number of accounts opened and a 17% increase in value for new SAR accounts acquired in the first half. Universal banking license will significantly enhance trust and brand acceptance among depositors, enabling the bank to optimize its cost of funds over time.
Cross-selling our full suite of products across cards, payments, insurance, wealth, trade, and assets remains a key priority for the bank, with a dedicated cross-sell department leading this initiative. In one of the newer initiatives around cross-selling savings accounts to our retail asset customers, we saw promising results with 95,000 SAR accounts opened in the last six months, contributing around 180 crore in value. Our insurance penetration is increasing, and we have now added LIC and SBI Life as our bancassurance partners this year to take total bancassurance partners to more than 15. Wealth and forex services are also seeing a gradual pickup. In wealth solutions, we are now serving 240, 000 customers with around 1,600 crore of AUM. On our AD1 business, we are seeing a pickup in transaction banking, BGLCs, and remittances, with forex income growing 50% year-on-year.
We have also launched a multi-currency forex card in partnership with Mastercard at Global Fintech Festival 2025 to cross-sell forex services to our customers traveling abroad. Enhanced acceptance among prime customers like salaried individuals, senior citizens, NRIs, and exim clients on the universal banking platform will further help the cross-sell initiative and reduce our customer acquisition costs over time. Now, moving on to our assets franchise, loan growth was led by core secured segments, which include retail secured assets and commercial banking assets. The loan portfolio, excluding unsecured businesses, grew by 22% year-on-year. Unsecured portfolio did grow by 23%. Total loan portfolio grew by 17% YoY and 4.5% quarter- on- quarter to reach around 1.23 lakh crore. We remain positive on our overall loan growth and continue to target a full-year growth in our guided range of 2x- 2.5 x of nominal GDP.
Retail secured assets is our flagship business, which includes deals, mortgages, and gold loans and has a legacy of more than two decades. This book stands at around 83,000 crore and forms 67% of our total loan portfolio. This segment continues to deliver strong performance with growth of 20% YoY and 5% quarter- on- quarter. Our lease book forms 33% of our total GLP at around 40,000 crore, with 14%+ yields. Lease grew by 26% year-on-year, which is market-leading in its segment. Credit cost remains in line with our expectations. We have a large runway for growth and expect to gain market share in this business with 20%- 25% annual growth over the medium term, led by our expansion in newer geographies and doubling of distribution from 550 branches in March 2024 to around 1,000 branches by March 2026.
The second key product is mortgages, which stands at around 40,000 crore and forms 32% of the total GLP. It includes micro business loans or MBS and home loans. Total mortgage portfolio grew by 14% year-on-year and 3% quarter- on- quarter. Credit costs and slippages improved sequentially in Q2. As highlighted previously, competitive intensity in MBS has significantly increased over the last few years, with small localized and niche players competing in every micro market across regions. We have been cautious in our growth in this segment, with growth at mid-teens in the last three years. Our endeavor is to increase this growth rate to around 20% by taking advantage of the expanded Pan-India distribution post-merger. The third product within retail secured assets is gold loans, which has a GLP of around 2,300 crore and forms 2% of the total loan portfolio.
There is no risk rate for gold loans, and the portfolio yields around 16%, with ROA being north of 3%. We have an opportunity to grow this business multifold and are scaling distribution, sales, and operations team. In Q2, the book grew by 19% quarter- on- quarter. The second key business asset line 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. Commercial banking has established a good track record with 30%+ CAGR growth in the last five years, stable asset quality, and ROA of about 2%. A significant portion of this book is self-funded, as this book contributes 8% of overall deposit book and 6% of overall CASA book. Total commercial banking GLP grew 22% year-on-year and 4% quarter- on- quarter. Asset quality remains in line with expectations.
We have a strong understanding of MSME space, NBFC lending, and construction finance, along with a full product suite backed by tech capability, including the AD1 business, which we started last year. We are working on creating sector specialization and expect this book to further benefit from the transition to the universal banking platform. So far, we have discussed the secured asset portfolios. Now, let me walk you through the unsecured segments, which did grow by 23% year-on-year and 2% quarter on quarter and formed 8% of the total loan portfolio. MFI is the biggest product in this segment, with the bank having a comprehensive micro banking relationship with customers, including micro savings accounts, insurance, payment solutions, and DBT linkages. It's an important business line for the bank, as it contributes substantially to fulfilling the 10% PSL requirement of lending to small and marginal farmers.
MFI book is around 6,200 crore, which is around 5% of our total GLP. The book has started to stabilize, with quarter on quarter degrowth moderating to 1%. We expect the portfolio to start growing gradually from this quarter onwards. On the asset quality front, the ex-bucket collection efficiency improved to 98.95% this quarter, the highest in the last five quarters, with September collection efficiency being 99.05%. The SMA book reduced from 4.3% in Q1 to 2.9% in Q2. Most of the incremental disbursements are getting covered under the CGFMU guarantee program, and the coverage at the portfolio level has reached 69% by the end of Q2. The other unsecured book is from our credit card and personal loan business. Total GLP is around 2,900 crore, which is 2.4% of the total loan portfolio.
Of this, the credit card book is around 2,200 crore, which saw a degrowth of 31% year-over-year and 3% quarter- on- quarter. Credit cost has started to normalize with Q2 marking the first quarter of decline in provisions and slippages in credit book in the last one year. We expect the book to start reflecting normalized credit costs by the end of this financial year. Incremental sourcing in credit cards is currently at a controlled pace, and it will take one or two more quarters for the impact of this new sourcing strategy to reflect in the overall book. Post-evaluating the new book, we will accelerate growth in this segment.
In terms of profitability, we delivered profit after tax of 561 crore for the quarter and 1,142 crore for the half year, with ROA and ROE respectively at 1.4% and 12.4% for Q2 and 1.4% and 12.9% for H1, respectively. Net interest income increased by 5% sequentially on the back of growth in loan portfolio and NIM improvement. NIM increased by 5 bps quarter- on- quarter to 5.5% from 5.4% in Q1. This uptake was earlier than expected and is primarily driven by the decline in cost of funds of 25 bps through targeted actions on high-cost deposits and repricing of SA book and reversal of excess liquidity seen in Q1. This 25 bps decline more than offset the drop in advances yield of 19 bps from 14.1% to 13.9%.
In the absence of any further rate cuts, NIM should continue to expand over the next couple of quarters as deposit book continues to reprice. Core other income saw a healthy growth sequentially as disbursements increased 20% quarter- on- quarter, and we witnessed increased traction in distribution of third-party products. Operating expense saw an 11% year-over-year and 7% quarter- on- quarter increase due to growth in disbursement and investment in manpower as we expand our distribution to Pan-India. Additionally, as part of our ongoing talent management and succession planning, we increased our ESOP program this year, with ESOP awards increasing by 75% on a year-over-year basis. However, we continue to target discipline control over operating expenses, with OpEx by total assets falling to 4% in H1 as compared to 4.6% in H1 FY 2025. Cost-to-income ratio was 56% in H1, which benefited from higher treasury gains.
Credit costs declined to 481 crore in Q2 versus 533 crore in Q1. With this, credit costs for the first half were at 1.28% on an annualized basis. Lower credit costs were driven by a 12% reduction in slippages during the quarter, with lower slippages seen in credit cards, mortgages, and commercial banking. We expect to see continued recovery in unsecured and seasonal recovery in secured assets in the second half and expect full-year credit costs to be within our guidance of 1% of average total assets. To sum up, Q2 was a milestone quarter for us as we received an in-principle approval for universal bank license. As we stand at this pivotal juncture, all dominoes are aligning for the next phase of our journey. Supporting regulatory policies, accommodative monetary measures, and progressive government reforms are creating a fertile environment for growth.
Our transition to universal banking is a once-in-a-lifetime opportunity and will provide us wider acceptance and strengthen our brand, which we are expanding across India. Our margins have started to improve, credit costs are on a declining trend, and our unsecured portfolio is stabilizing. With robust growth engines and deposits in assets, we are well positioned for sustainable growth, and our investment in distribution expansion will continue to provide momentum to gain market share. Backed by a stable and experienced team, strong execution culture, and no legacy systems in our technology stack, we are fully prepared to capture emerging opportunities and deliver consistent value to all stakeholders. With that, I will now hand over to Prince for Q&A. Wish you all a very happy and safe Diwali.
Thank you, Gaurav. Ruthika, we can now open the call for questions.
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 the 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. The first question is from the line of Mahrukh Adajania from Nuvama Wealth. Please go ahead.
Yeah, hi. I just had a couple of questions. Firstly, in fees, usually in the second quarter and even in the fourth quarter, there's a lot of seasonality. Even in the past, if you see, you'll see a big jump on a sequential basis in second and fourth quarters. Last year, there was no festival either, but we still saw that. What's the seasonality in these quarters? I'd like to better understand that. Are immediate green shoots already visible in October for a significant recovery in credit costs in the second half? That's my second question.
Thanks, Maruk. This is Prince here. While I'll take the other income, I'll let Vivek answer on the credit cost. As far as other income is concerned, you're right. Typically, Q1 is generally a relatively slower quarter, immediately after the Q4 bonancy. Historically, I think in the retail banking industry, if you see, the half-yearly closing and the annual closing has always been great, both in terms of business disbursements as well as the third-party product distribution. Even this quarter, we saw 20% growth in our disbursement numbers on a quarter-on-quarter basis. That does help in the overall other income as well because you get a lot of fee income from the processing fees as well as the higher accounts that we have opened.
Even on the banking fee, if you see, and I think Gaurav articulated in his call that we have started opening accounts for our asset customers, and we have opened some 95,000 accounts in the last six months. That's an added delta that has come up over and above the branch banking. To some extent, that also helps with the entire branch banking fees, right? I think there's no one-offs there. It's just seasonal, and hopefully, it should continue. Vivek, do you want to?
Yeah. So Mahrukh, on the credit cost, you know, though our unsecured book contributes about less than 10% of the book, there is a significant portion of the credit cost coming from microfinance and credit cards. Now, having said that, in the last quarter where we called out that our credit cost has peaked in credit cards, you would have observed there is a significant reduction in that. Going by the current performance of our microfinance book, we see that it has peaked in this quarter and would come down substantially in Q3 and Q4. We are very confident, and there is a seasonality attached to our secured assets as well, where we see a strong pullback in H2. That has always been a trend for so many years.
Considering both the factors, where we see that significant drop in the unsecured part on the credit cost, as well as the pullback in secured assets in H2, we are confident that our credit cost for the full year would be on the guidance of 1%.
Okay. Perfect. Thank you. Thank you.
Thank you. Thank you.
Thank you. The next question is from the line of Jayan Kadothe from Axis Capital. Please go ahead.
Thank you for the opportunity and congrats on a good set of numbers. The first question is on OPEX. For the first half, OPEX control has been pretty strong, even despite this 20% uptake in disbursement. How should we now think about OPEX? You're averaging around 4% of assets versus your usual past few years on the rate of 4.3%, 4.4%. Heading into the second half, how should we think of OPEX? A broader question, I've seen your PPT, you outlined that even after transition to the universal bank, you don't expect OPEX to jump in a meaningful way. If you could help us understand what has changed in the thought process around OPEX, that is my first question. I'll follow up with the second one after that.
Yeah. So on OPEX, last year, I think we were at around 4.3% of average assets for the full year, right? This year, we expect to do better than that. Where we exactly land up, we will know more as we progress during the year. In Q3 and Q4, you will see some increase, which is accompanied or as a result of increase in disbursement during the stronger quarters of the year, right? In terms of how to think about the OPEX line over the medium term, there are two aspects. One is we will continue to invest in growing the franchise. You saw some of those investments in increasing headcount as we increase distribution of our retail secured assets in the newer states. That's one. Second, for our overall overheads, we are continuing to be very, very disciplined on where we spend money and how we control that line.
It'll be a twin-pronged approach of being very disciplined generally, but not shying away from the investments that are crucial for our growth over the medium to long term, right? Overall, our guidance has been that we will be below 60% in terms of cost-to-income ratio, and we will be below, say, 4.3% in terms of cost to OPEX.
That's great, sir. Second question is around the loan mix. I see the commercial mix, I mean, commercial loan growth has come off. Even microfinance, if I see real estate is, of course, pushing hard, but I see business banking also has not moved meaningfully. What is the thought process? Is this one-off this quarter, or how should we think now? Would you be using commercial book to calibrate your growth and margin mix going ahead? How should we think about this?
See, Vivek, the growth in commercial banking books, and when we talk about working capital book, business banking book, is largely driven by the underlying economic activity. I think Q1 and to an extent, the larger part of Q2 was a little muted. Now, we see because of the GST reforms and the consumption picking up, the activities have picked up on the ground. We see that the strong demand should continue in Q3 and Q4. Typically, the disbursement in our any business, even in retail asset, is more skewed towards the H2. We expect that the momentum will build up from here on.
Is it the NBFC loans that you've pulled back on right now?
NBFC MFI loans, sorry.
Sorry?
NBFC MFI loan is, again, that's a function you do on lending to MFIs. If there is a muted credit demand, the whole credit in the industry has grown by 10%, right? You have to understand that if there's no lesser demand, the demand pickup for on lending will also be lesser. We are seeing a traction in the festive season where typically all the vehicle financer, the MSME lending institution, there is a greater disbursement traction. We expect that Q3, Q4 should be much better. Plus, apart from the loan book, there is some part of the lending that happens in the form of subsidy credit, which is more like NCDs and sits in the investment book. It's always the structure which suits the customer and that kind of need which decides.
Sometimes it does not reflect here on the advances, but it's a part of credit substitute in the investment book.
Hi, I am Sanjay Agarwal. The agenda is not to degrow or grow some book on some basis, right? We are having a very clear agenda that growth has to come back, and the retail asset has done well in the last two quarters. We have grown that book. Of course, commercial banking has its own challenge because of yield pressure, so we haven't gone in and underwritten the lower yield assets. We are working on our microfinance book. We are working on our credit card book. The growth agenda is back, but we will take the whole thing in place so that our yield versus returns also get protected, right? We are not taking only one-dimension kind of strategy. It's a wholesome strategy where we'll see our yields and the asset quality, the growth number, and then we'll decide our course.
We have so many books, honestly, right from retail asset, weeds, MBL, affordable housing. Then we have business banking, agri banking, NBFC, REG, microfinance, PL, BL, credit card, right? It's a combination of an entire product mix now we want to focus on. Nothing being left out, nothing being focused more. We want to build every aspect, basically the practicality and, of course, the reality of the market.
Understood. Thank you, Sanjay. Thank you, team, and congrats for the great set of numbers.
Yeah, thank you. Thanks, Jayan.
Thank you. The next question is from the line of Param Subramanian from Investech. Please go ahead.
Yeah, hi. Thanks for taking my question and congratulations on the quarter. Firstly, the question is on the, last time you had called out issues in the South India-based lab segment in terms of asset quality. How is that portfolio behaving as of now? I can't see that in the presentation.
Yeah, Param, this is Vivek. When I highlighted the, you know, called out on the last quarter, I would say it was a, you know, we also for one state, we said South. It was just one state, which is Andhra. Second, as mentioned in the last call, that, you know, we were building out the collection and legal infra. That has started playing out. We saw good recoveries in terms of slippage have reduced and in terms of good recoveries from NPA pools. All the processes already started, right? It's a typically six to nine-month cycle when you start doing it because the repossession of assets or the SARFAESI instrument takes some time. Once you have a field collection infra which is in place, your slippage automatically reduced, right?
Okay, is it not a problem anymore as such, or is it normalized already?
Yeah, it was not a problem last time also. Okay, I'm Sanjay Agarwal. Of course, Vivek was generous enough to very transparently tell everybody that we, because we as a team took over the South India market recently in the first quarter itself, right? One market, one book, were giving us a different color. We were honest enough to call out and tell you all your people, but nothing to worry. The entire force is there. We've been known as the good collection. We've been known as a good team around our collection or recoveries, right? That character and that culture has come back. We are hopeful that South India markets will come back to be our own numbers and our own standard and will also give us next waves of growth.
Sure, sir. That's really helpful. Sir, if you could call out, what was the size of this portfolio? Basically, there has been some corrective action from a collection perspective, right, that is now helping us, right? What was the size of this Andhra portfolio?
1,000 crores.
Okay. Fair enough. That's really helpful. Secondly, Sanjay and team, if you could help us with how you're seeing demand. We are now three weeks into this, you know, post-GST cut and festive season. If you could talk about demand across your portfolios, especially wheels or across products, how it's shaping up and how third quarter and fourth quarter to you start broadly looking.
Yeah. Param, we are not concerned, honestly. Our size is so small, you know, and our franchise is being built entire, you know, the whole country, right? It's very early days because GST cut happened last week of September, and we are just two weeks in October, right? It's difficult for us to comment because sometimes it's just one-off. We can't give you some direction that if something happened now, maybe the reason of GST, maybe the reason of festivity, right? We want to take, you know, maybe a little bit more conservative view here that we don't want to comment large there. The growth is back. I can only say you that because our franchise has gone from a north market or west market to even to East India and now in South India. We have enough market, you know, to us.
Our growth will happen through market share rather than market growth, right? That is the way we are focusing ourselves. Our focus is more on that let's reduce our cost of money. We have enough diversified asset classes. Pick your asset class depending on the state, you know, requirement and then build on. We are in 21 states, four union territories. I believe that AU Small Finance Bank, you will see in a different avatar from here onwards because our approach has, you know, changed from the growth to the market, capturing the market share, you know, is, and that's it, right? Yeah.
Yeah. Sure. Really appreciate that, Sanjay, sir. I was just trying to understand. I appreciate you are the market share gaining entity, but broadly, if demand is, say, better than what you would have expected post the GST cuts or inline or some sort of directional comment if you would think.
It's difficult, honestly, because this, Param, difficult as of now because last year also at the time of festivity, there was a growth. I don't want to color the market, you know, because for me, if the growth or demand remains same level in November or December, that would be the right kind of the direction, right? October is full of festivity, right? The vehicle demand is there. Home loan demand is there. Business banking is picking up. NBC demand is there. Credit card demand is there. Personal loan demand is there. I don't know whether it will sustain after the festival, right? That's why, you know, in our case, it's not about demand. It's about our market share in the existing price, right? That's why I'm saying that we will grow.
Sure. Really appreciate it, Sanjay, sir. One last question, if I may, margins, how to think about margins going into the second half and next year because of what is happening with the mix along with what you're doing on the funding cost? That's it from me. Thank you.
Yeah, Param. As we said, as Gaurav Jain said in his commentary earlier, the margin uptake kind of began a bit earlier than what we would have initially envisaged. Deposit cuts have been the, I mean, the deposit fee pricing, especially on the entire SAPEs that we have taken, I think that has been one of the biggest beneficiaries. Also, lower slippages have helped, right? Given that last quarter there was a relatively larger slippage, this time we had a lesser slippage, 12% reduction. That has also helped in terms of reversals of some of the incomes. Having said that, to answer your question, I think the impact of repo rate cut on the yields is done, right? We don't think that any more residual impact is left over, which is material or meaningful to call out.
Assuming no more rate cuts, you would see deposit price continuing to fall for a couple of quarters because we had said earlier as well that it takes about 12- 15 months for the entire rate transformation to happen. We are just about, you know, four to six months into the cycle, depending on where you start from, right? We do expect some amount of depository pricing. At the same time, as you rightly said, the asset mix is also shifting, right? The unsecured, while they will stop degrowing from this quarter onwards, still the growth will not be more than enough to, you know, take care of the deposit mix, sorry, asset mix change. Because on the core assets also, we are growing pretty well, right? As you saw, 22% we grow year on year in our core assets.
I think some bit of adjustment for asset mix and some positive benefit on the cost of fund side should help the NIM to continue improving for the next couple of quarters, at least.
Fair enough. Come back to more or less Q4 of last year or somewhere close to that.
I mean, we'll see, right? We don't want to call it out right now or we don't really know because, as Sanjay said, we have too many variables. Let's just wait it out and watch it out.
Thank you so much. Thanks, Prince. Thank you, Sanjay and team.
Thank you.
Thank you.
Thank you. Thank you. The next question is from the line of Ramesh from ICICI. Please go ahead.
Yeah, hi, sir. Congratulations on a good set of numbers. Just two things. One on the strategy side. Once we get the universal banking license, though we have got the principal approval.
Sorry, Ramesh, the voice is not very clear.
Is it better now?
Yeah, go ahead.
Yeah. The first thing on the AUM mix side, obviously, once we convert into universal banking and the minimum ticket size cap of INR 2.5 million goes away, the inclination will be more towards a growing commercial banking piece from a branch banking perspective. Once that happens, given this book is yielding 11%, much lower than the retail asset book, how do you see the AUM mix changing over the next two to three years? I get it, the next two quarters, NIM expansion will continue. Getting into 2027, 2028, and once you start getting more businesses from your branch, which will be more from a commercial banking part, how do you see NIM settling in the medium term?
Ramesh, hi, Sanjay Desai. There is no plan to go above a level in commercial banking. Our comfort zone, like, our, you know, where we feel comfortable is more around retail asset. Our wheel book is only around INR 40,000 crore. I don't think that you should even look at any other book than that because we can still build that book around INR 2 lakh crore, honestly. You can see our competition level, right? They're around INR 1.5- 2 lakh crore books. Our mortgage book is just INR 40,000 crore. We can go take it up to INR 1 lakh crore. Our gold loan book is just INR 4,000 crore. You know how that book is shaping up.
I don't think that there is any kind of strategy in place where if we get to universal license, which we will, we want to change our mix or we want to have a different strategy on a universal bank. We love this space so much. We like this. We are working in this space for the last 30 years. We are the market leaders, right? The idea is to become universal to lower the cost, not to change the asset mix. Our business banking also gives a yield of around 10% plus. We are not at 8%, 9% as of now also, right? Our NBS yield is also 10% plus. Agri banking is around 9% plus. We don't play to the galleries, right? We have built our own niche, our own market. We play on our product innovations, on our tech, or on our speed execution, our distribution, right?
We believe that, in the next 5- 10 years, once you will become Pan-India franchise in terms of distribution placement, you will see our growth in a very different level, right? We know that what made us till now will take us forward also, right? There is no plan to become a wholesale lender or be into a corporate finance, unless and until it gives us a low cost of money.
Got it. No, sir. Yeah, it's because also, you know, in PPT, you did mention about getting into renewable energy infrastructure and all. I thought, are we thinking, you know, expanding commercial banking faster than we can? Thanks for the clarification.
Yes. Ramesh, Vivek, just to clarify, what we are saying is that the focused approach helps us to grow more sustainably. It also does, you know, it's better to manage risk because we are a very focused team. When we started commercial banking, we started focusing on segment, right? That is why we created a different book for NBHC. We created a different book for real estate. Similarly, within the businesses, if you have a sectoral approach, people who understand that sector can manage it better and can also grow it better, right? That's a reason we want to focus sectorally, right? Renewable energy is one area where we've already started, but others we will slowly build. We'll see how we get the sectoral insights and how we get the expertise to underwrite and to source those kinds of customers.
If you become the subject expert in terms of lending, then your tech improves. If your tech improves, you are in a better position to bargain. Like, we are the leader in NBFC, right? People give us 100 bps more than the other people, right? Because once our name is on the lender list, people value it, right? I think we are playing on our strength. Sectoral focus will make us more strengthened in our whole positioning in terms of the borrower's eye, right? Yeah. Yeah.
Also, Ramesh, we're not saying that we will change our ticket size. That focus will remain on the same small and medium enterprise. That is what is our core area there. Got it. Got it. Just a last thing on this, retail lending works, which is sort of likely to be recognized. Any first order in the tech analysis would you like to share once that gets recognized?
On the tariffs?
No, no. ECL framework on the universal bank.
ECL, Ramesh, honestly, it's too early to comment, right? It's on a draft basis. You know, there are so many nuances, but we do prepare performa. I think historically we have done it. In our view, it should be neutral to positive, right? It's too early to give you any kind of directional comment right now, but definitely neutral to positive.
Got it. Got it. No, this is very helpful. Thank you in terms of like AU Small Finance Bank things.
Thank you. The next question is from the line of Kunal Shah from Citi Group. Please go ahead.
Yeah, hi. Thanks for taking the question. Again, just harping on the growth part. When we say like two and a half X of the nominal GDP average, today if we look at it, we are closer to 17% AUM growth. Maybe how quickly can we get towards that? Are we good enough in terms of the asset quality stabilization, NIM stabilization to get it quicker? Second is on the overall on-balance sheet. I think overall AUM growth has been lower. I believe the reliance on downsell is not so high. As we get to the growth path again, we would get to the downselling or maybe the overall on-balance sheet growth will still continue to be higher than the AUM growth. What would be the stance on the downsell after we reach that two and a half X GDP growth?
Thank you for that, Kunal. Even if you see today, our growth has been 22% YoY on the secured side. The 8% book, which is unsecured, which is microfinance and credit cards, has been going through its own refit cycle. As we said in the early opening remarks, that is also coming to an end now. We should start seeing microfinance growing from this quarter onwards, as well as credit cards will start growing probably in a couple of quarters. We are coming, so on secured assets, we are already doing 22% plus. We don't really see, honestly, when we track, we track AUM growth or GLP, because from our perspective, whether the asset is sitting outside the balance sheet or in the balance sheet, it's the same thing. Having said that, we used to securitize in a period when the growth was really, really strong.
I don't think that at two to two and a half times, we are really looking to do an off-book build-out. You should look at a GLP level, which is the gross loan portfolio. We should continue to grow within two to two and a half times. We are reasonably confident because the second half is always stronger as compared to the first half, both for secured assets. As I said, unsecured assets will now start contributing positively rather than negatively.
Got it. Sequential momentum will definitely accelerate given the unsecured is now almost done.
Absolutely.
Got it. Maybe with respect to ECL, what would be the positive? It's maybe neutral, I could still understand, but you confidently have even indicated in the presentation that ECL impact could be positive as well. What are the positive levers which are coming from the ECL and not much of the provisioning risk? Maybe even like say on the vehicles and all, you would have a relatively higher stage two, but it is good enough to even offset that. Just wanted to understand that. Yeah.
As I said, it's too early to actually comment on how it will play out on the exact numbers. The reason why we say neutral to positive is we do prepare pro forma, which we submit to regulators, and whatever we did last basis that I was talking about it. The primary reason is that our LGDs have always been lower, right? If you go back and see our NBFC days and you compare our credit cost on each of the books independently, you'll realize that the loss given default for us has been historically very, very low. In vehicle, I think we have publicly called out in the previous equation, it has been anything between 35- 40 bps, whereas our coverage ratios will be much higher. There also will be an interest impact that will flow back to us.
I'm saying there are nuances to that, and we need to figure that out. On an overall basis, we are not really worried.
Got it. One last question in terms of the data points. What is the cost of SA and how much of it has already got repriced? In the coming quarters, would it be only another 25 bps which is left now?
I think with the latest rate cut, we are looking at going below 5%.
Going below 5% in terms of cost of savings accounts?
Cost of SA, right? We were at 5.1%, if I remember correctly. We should hopefully try and see if we can reach there.
Okay. Got it. Yeah. Thanks. Yeah.
Thank you. The next question is from the line of Akshay Jain from Autonomist. Please go ahead.
Yeah, sir. I have a question on capital. Can you please help quantify the impact on your capital ratios post-conversion to the universal bank? Because now you don't consider market and operational RWS in your base. Second, on the draft credit risk circular, have you done any estimates on how it will impact the capital ratios for your bank?
Yeah. Two things, right? On the capital structure, the first one is you're right that we will need to take into account operational risk RWAs and market risk RWAs. Of these two, market risk RWAs are not meaningful, right? It's the operational risk RWAs which will increase. On the flip side, the capital requirements would come down from 15% minimum capital requirement to eventually 11.5%. This will be sort of, you know, broadly, it should be neutral to positive for the bank. The board will decide what capital ratios we want to run on the universal banking platform, and we'll come back to you on that. Overall, I think on the capital as a whole, it will be neutral to positive for the bank. That's one.
Second thing on your questions around RWAs, on the draft guidelines, you will see a benefit coming from the collateral, from the loans which are collateralized by residential properties, right? Where the risk rates would probably come down by 40- 50%. That will give us a significant benefit on some of our loan books there. Other than that, there are some benefits and some negatives which broadly cancel out, right? The biggest, in the ultimate analysis of this, residential mortgage collateral will give us the most uptake. In the rest of the stuff, there are some positives in credit cards, some positives in the investment, MSME, some positives in the rating-based investment book, etc., which gets offset by an increase in the risk rate of the unutilized sanction limits.
What will be the proportion of this collateralized, that is, collateral against residential property? Any indicative number? Like your MBL book is close to 25% of your overall loans. Is it safe to assume that 25%?
You can just look at our loan mix, right? INR 40,000 crore is the mortgage book, and then you have another INR 25,000 crore of commercial banking book, which is a mix of MSME, NBFC, and real estate, right? That will give you an indication of a portion of that being backed by this collateral. On the mortgage book, most of it will be residential housing, the majority of it.
Okay. Thanks. Is it safe to assume that, you know, because 40%, INR 40,000 crores of your book is mortgages? If I just do some reverse calculation, like 40%, if I assume on that book, it comes to INR 16,000 odd crores. Your total loan portfolio is around INR 115,000, INR 120,000. It would be safe to assume that, you know, a double-digit reduction in RWAs is what we should achieve for AU Small Finance Bank?
I think I don't want to give out specific numbers, but what I would say is you also need to take into account the business banking and the agri banking books, which would be some of that will be backed, right? Your starting point is not INR 40,000. It's probably higher.
Yeah, that increases the benefit.
Yeah. Yeah.
Understood. Okay, thank you.
Thank you. The next question is from the line of Nithin Agarwal from Motilal Oswal. Please go ahead.
Yeah, hi. Am I audible?
Yes, you are. Please go ahead.
Yeah, Nithin.
Good evening, Sanjay and team, and congrats on a good quarter. A few questions. First, on the credit cost, now that we have reported a 64 bps in the H1 based on total assets and maintaining 100 bps guidance. Is this credit cost that you see in H2 going to be a reflection of the trends in FY27? Do you think that will improve further? Is this H2 number slightly boosted by the recoveries that may be there from the NPAs that we had in H1? Can we expect an improvement further continuing FY27 on the second half number?
Nithin, we are confident about this year, right? Because we can visualize the entire ecosystem, you know, we can see quarter three, quarter four, right? We believe that 100 bps credit cost, you know, we all are working hard to be in that number, right? We strongly believe that team should get that number. 64 bps H1, you know, is a great set of numbers because H2 generally, you know, helps us to reduce the overall credit cost for a year. We are absolutely on track for this year. Next year, you know, again, too many variables, too many things, you know, which come from nowhere, right?
If you ask me that, if things remain, you know, in a similar kind of zone, which we are seeing as of now, the credit card still can come down because I don't think that credit card or microfinance business, which is giving us, you know, the 50% of credit card cost, 50% credit cost is coming from that two books, right? Which should not give us that kind of, you know, challenge next year. Our idea is to be around, you know, 80, 85- 90 bps kind of benchmark, you know. I don't want to, you know, give you any number there because it's difficult to predict for the entire next year. I think this year is one of the best years for us from last maybe 18 months or maybe two years, you know.
We are quite hopeful that from here onwards, you know, the credit cost should remain in one zone or in one, you know, numbers. Yeah.
Right. A second question, Sanjay, is on the universal bank transition. Why we know that this discussion is still underway, by when do you like tentatively think that the transition to universal bank should get completed? Do you see any material rise in OPEX towards branding and advertising as you undertake this transition?
We actually have already commented that our idea is to start our 11th year as a universal bank. We still have six quarters to complete that. The Reserve Bank of India has given us an 18-month period, and we believe that we should become in that timeline. The advantage of getting in-principle license has already been in now on our balance sheet. People have recognized us as a very credible or a very forward-looking kind of institution. From 7th August, we are getting enough acceptance in the market as a whole, which is great for any financial institution that people are actually treating us like a universal bank only nowadays. That positive impact already started coming in. I would say that it would take some time before we really become universal, but we are working with the Reserve Bank of India, with the regulator, to achieve that.
What was the other question? There won't be any OpEx or anything which may cost us on our balance sheet. Rather, this whole staggered transitioning from SFB to universal in the next 18 months will allow us to do really a market expense also, the marketing expense also on a long-term basis than a one-off kind of basis, right? As of now, Nithin, difficult to comment on one-off form of marketing expense, but other than that, everything is business as usual.
Right. The last question is on the number of employees. There is a sharp rise at around 4,500-odd employees that we have added this quarter. Yeah. How are we looking at that? I mean, this is a very, very sharp number to look at the increase that we have had in the last two quarters, in fact. How do you see the OPEX, any implications on this on the cost ratios? Will it again start to go at a faster clip? How do you see that?
Nithin, the agenda of growth is back. We are seeing not much business opportunity in our newer geographies like South India, East India. The entire growth, which you're seeing in workforce, is largely in salesforce or largely in underwriting space. We haven't added much more force in backend. The idea is to make them productive in coming time and bring the growth back. We are now focusing ourselves more and more on taking the market share from the newer geographies. There would be some little bit higher OPEX, but it will eventually help us to bring back growth on our business numbers.
Right. Just one last question, if I may squeeze in, is also on the credit card portfolio because that is giving us quite an addition to the total credit cost, the perspective of the size of the portfolio, which has come down meaningfully. It still contributes meaningfully in respect to the total credit cost. What is the like outstanding revolver in the transactor mix now that we have in this residual portfolio?
Sorry, Vivek.
That's given on slide number 36, Nithin. The revolver to transactor mix, the transactors are 48%. The revolvers are 25%, 26%, and 27% is EMI or loan PM. As we had highlighted earlier, the entire credit card book, I mean, we had taken a lot of corrective actions over the last 8-1 2 months. We had identified a certain book where most of the risk basis are, you know, analytical tools where the risk could emanate from. That's the book which is now slowly winding down. That's why you see this quarter is a substantial reduction, almost 50% in terms of the credit cost that's coming from that book. That's where Vivek was saying that we'll continue to see positive benefits in the coming quarters.
Right. Got it. The credit cost would eventually come from these slippages, right? Slippages are a leading indicator that, so in this book, my slippages have come down substantially from, you know, Q1 to Q2, and we would continue to see that momentum going forward. Maybe on a standalone basis, Q4 should be more similar to what industry benchmarks are, right? That's what we think.
How much more this revolver would have been at the peak now that it has come down to 25?
This would be around 35, 35, 36.
35, 36, 35, 36. Okay. Thank you so much for answering all the questions. I wish you all the best.
Thanks, Nitin.
Thank you. The next question is from the line of Ranuj from 3P Investment Managers. Please go ahead.
Hello. Hi, I hope I'm audible. Just a couple of questions, both on the deposit front. You have been pretty active in trimming your SA and TD rates. From here on, what would be the key hook that you would have to gain share amongst the, again, SA share amongst the customers? Previously, I think credit cards and PL used to be one of the propositions which you used to cross-sell, but now what would be that hook? Second is you mentioned on your retail asset base, you are cross-selling SA. If you could get some color of what is the self-funding ratio on your retail asset base and what would be the pitch to move customers, or to cross-sell the SA accounts to the customers?
Yeah. So, you know, Pranuj, no, thanks for that question. I think the entire focus on build-out of SA has been to build granular SA, right? That has to be on the basis of the engagement with the customer and the various products that we can try and cross-sell to the customer so that the engagement and the hook kind of increases. That's why over the last three or four years, or five years rather, we have been investing heavily in building out various hooks which we can try and cross-sell. You mentioned credit cards and PL. These are two. As we said in the earlier comment as well, we are looking to grow these businesses back. It's not that we are going to wind down these businesses, right? There had been some underwriting tweaks that we were doing.
Having got some confidence, as I said, in a couple of quarters, we'll start growing that back, right? That obviously remains one of the biggest hooks. Apart from that, we have now got the insurance penetration. We have now built out insurance partnerships with more than 15 insurers, right, including LIC and SBI Life, right? We also have the entire wealth management that we have built out, right? That is showing a good traction, right? Of course, SFB brand doesn't really help from a wealth perspective. As we migrate to universal, you know, the team is ready. Incrementally, we are seeing traction. We publish those numbers. As I said, currently, the AUM is about INR 1,600 crore, right? There is the entire AD1 license where the FX and remittances piece is coming through. I think in Gaurav's earlier commentary, he highlighted that the FX income is now growing almost 50%.
Of course, from a low base, right? That also tells you that there is a lot of adoption in terms of remittances and in terms of customer forex requirements. We just launched the FX travel card as well. I think the idea will be to try and reach out to a customer with a full basket of products, not necessarily only talk about interest rates. Of course, interest rates are important. As we build the brand, probably we start putting interest rate in the rearview mirror and talk more about the bank, the products, the services, right? Maybe at some point in time, probably near future, I can also offer a very, you know, let's say, a specialized rate on the saving on the car loans and housing loans to my liability customers.
If somebody is maintaining good balances with me, I'm not going to incur a cost of acquisition, right? There's bound to be lower credit costs on that business. I don't really mind going to a customer with a complete bouquet of products rather than only talking about interest rates, right? That's going to be the strategy the team will need to work on. Distribution is definitely helping, right? Universal is definitely helping. As Sanjay said, just by getting the license itself, the number of conversations that we are now having with customers or the quality of conversations we are having with customers is very different than when we were probably in the early stages of our SSB life cycle. Just last point, I think to your question, most of our asset customers are self-employed.
I mean, I don't know, probably more than 90% plus maybe, but at least on the retail side, they're all self-employed. As of yet, because our cost of funds don't really allow us to reach out to our salaried customers like yourselves, right? That is where I need to bring you in with a liability and product and services and then try and cross-sell you on the asset with a specialized teaser rate. Hope that answers your question.
Okay. Fair to say the self-funding ratio would be quite low amongst the retail asset customers as of now?
Sorry, what was the question?
Yeah, yeah. That's correct, right? Self-funding in the retail secured assets would be low. That is with every bank because the retail asset we are building on is with the customer who lives in semi-urban rural areas, right? That's why we get a yield of around 14% to 15%, right? We can't expect those customers having enough money to keep in the bank account, right? Our commercial banking self-funding is around, what, 40%?
More than 40%?
Yeah.
This contributes to 60% of the savings accounts?
Yeah.
In fact, even on the retail side, we have made a beginning. As you said, I think we have opened 95,000 accounts.
That is close to 10% only, right? If you have an INR 80,000 crore book of retail assets, then it's just an INR 8,000, INR 10,000 kind of deposit, right? We don't expect, honestly, to get a deposit from our retail customers. Rather, we want to cross-sell them insurance. We want to cross-sell them, maybe the PL or BL, in case they need it, right? We earn a decent ROI from our asset customers. That's our business model.
Got it, sir. Thank you. Thank you, sir. Thank you, Prince. That was very clear.
Sure, thanks. Thanks.
Thank you. The next question is from the line of Teral Engineer from CLSA. Please go ahead.
Yes, thank you. Thanks for taking my question and congrats on the quarter. Just firstly, one clarification. Prince, you mentioned LGD in vehicles. I didn't hear it correctly, but did you say 35 to 40%?
Bps, sir. I mean, 35- 40 bps. We have a PCR of, yeah, we have a PCR of around 70% on wheel go. Then 50% is only the real, LGD, right? So nearby that, yeah. Basically, when loss given default is very different than the accounting entry in terms of the provisioning, right? When we repurchase the asset and sell it, what is my eventually, what is my, the principal loss, right? That is what Prince has mentioned, somewhere around 40 bps, right? 30- 40 bps. That's the actual number. Overall basis. Of course, some book would be giving you more, some would be giving you less, right? Overall, it's not more than 50% of our provisioning.
Yes, absolutely. Absolutely.
Okay. Understood. Fair enough. Just coming to my questions. Firstly, given that you know your mix of loans has changed in the last one and a half, two years, first you got the microfinance book, now you've run it down, and we've seen this whole cycle play out. At what level would your gross slippage ratio sort of stabilize? Because obviously, currently, also while it's improved, I don't think this is a steady state number, INR 900 crore a quarter. What should we assume as a steady state number? Or what would you?
It's not something which we are targeting, but yeah, obviously, as these two assets, right, credit cards and, you know, microfinance would stabilize, eventually, it's about 2.5% kind of a slippage ratio we would have, right?
Yeah. Okay. Two and a half.
Yeah, two and a half to three. I mean, that will be a range that we'll work with or historically we have worked with because even on the retail businesses, you know, typically, you have about, there is a tendency of the customer slipping into NP and then recovering back, right? I think anything around 2.5%- 3% annualized slippage rate is where we should stabilize finally. That's just a ballpark. I mean, it's not a number that we have targeted or we have a defined target around that number. We track credit costs more, more importantly.
Okay. Fair enough. Just secondly, now I know you're not explicitly calling out how much NIMs will finally recover to over the next three, four, five quarters, but would you be still targeting erstwhile NIMs of 6, 6.1%? As in, okay, or my question really is, let's say our TDs reprice downwards, but you still hit a NIM of only 5.7, 5.8%. Will you resort to, say, further SA rate cuts or actions on the asset side to get back to that 6% NIM that you were?
Look, we don't want to guide specifically on NIM. I think we have talked about all the components of NIM, right? The deposit rates will continue to come down. We are through most of the or almost all of the repricing from the repo rate cuts. Prince has spoken about asset mix changes, right? Effectively, your NIM would be a function of asset mix, right? Your current yields on the other books, which may be subject to competitive or market pressures, right?
Correct.
Would be your cost of funds and reversal of excess liquidity, right? Especially in the lower quarter, right? So those are the.
Leverage, and when it came 6, the leverage was high.
Yeah. Two components to look out for are you have very high slippages in your unsecured assets, which have been detracting from NIM through interest income reversals, right? Once my credit quality sort of stabilizes in those two books, that will not be detracting, and they will be adding to the positive asset mix as well, right? There are a lot of moving parts. The other thing is the capital structure that the board decides to run on the universal banking platform, right? A lot of moving points. What I can tell you is we will get better from here.
Understood. Okay. That helps. Thank you and wish you all the best and happy Diwali.
Thank you. Thanks, Peran.
Thank you. The next question is from the line of Ashley Soundre from Kotak Securities. Please go ahead.
Good evening. Just one question from my side. If I look at your mortgages business, including both housing loans and MBL, if you look at some of your core states, let's say if you pick up Rajasthan and MP, do you see any elevation in the delinquency level, let's say, over the last one, one and a half years?
Growth has been challenging.
Ashish, Vivek here. See, both markets are different. In fact, when you're clubbing them, both behave differently. Rajasthan has a very different trade culture. MP has a very different, it's more of an agri economy. Any agriculture cycles would impact. Having said that, there is no significant difference in what it was there last year and what we are seeing this year.
Okay. Perfect. Thank you. Yeah.
Thanks, Ashish.
Thank you. The next question is from the line of Hemansha Taluja from Aditya Pilla Sun Life Asset Management. Please go ahead.
Hi, sir. Congratulations on a good set of the numbers. Just a few small questions here as most of the questions have been answered. Sir, given your OPEX, you're partly, on the OPEX strategy, partly you've already answered in the Nitin question, that you don't want any OPEX to be on a front load and will be on a more long-term basis. Anything from a given you wanted to transition in the next five quarters towards the as a universal bank, any further, any investments which may be required towards the operational or the, or on the digital journeys, before you wanted to transition this? Second is, are you working towards an internal strategy where you wanted to keep the OPEX as a threshold cost-to-income ratio, around the 60% levels? Lastly, any guess which have you identified before you wanted to successfully move this transition? Yeah, that's it. Thanks.
On your first question around expenses for transition, there is nothing specifically that we need to invest. As we have spoken multiple times, we have invested in the platform ahead of the time in each of its aspects, whether it's product development, whether it's tech, whether it's team, whether it's governance. The bank is fully ready to transition to a universal platform without having to incur any additional expense. Any expense that we choose to incur is discretionary, and that will be around the marketing expense that Sanjay spoke about. That's the first point. The second point on your cost-to-income ratios, I think the way to think about it is, we have guided to a 60% cost-to-income as the maximum, and we want to stay below that. Now, two things.
We think we can grow our balance sheet sustainably at between 20%- 25% on a multi-year basis, and my growth in OPEX would be lower than that because of operating leverage and because of tech-driven efficiencies. As a result of these efficiencies, we will have a capacity to invest for our growth as well, and that's a calibration that we do on an annual basis, on a semiannual basis, depending on the trajectory of the business. Net-net, we would try and target a cost-to-income ratio which is better than 60%, and we would be better than 4.3% on an OPEX to assets basis.
Sure.
Okay. Did you have a third question as well, or was that it?
Yeah, that's it. That's it. Broadly, I think you have already answered on the third question.
Thanks so much, Hemansha. Thank you.
Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Prince Tiwari for closing comments.
Thank you, Rituja, and thank you everyone for joining the call and for your questions and for all your support. In case you have any further questions, kindly reach out to the IR team. Good evening and good night. Happy Diwali to all of you.
Thank you.
Thank you. Happy Diwali.
Thank you very much. On behalf of AU Small Finance Bank, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.