Creating Long-term Platform For Growth

Au Small Finance Bank

Along with a stellar performance, the bank has also sought to diversify into savings products such as deposits, payment and transaction banking, distribution of third-party products and additional loan products, thereby positioning it as a holistic financial products and services provider

AU Small Finance Bank is an Indian scheduled commercial bank that was founded as a finance company called AU Financiers Ltd. in 1996 and transformed to a small finance bank on April 19, 2017. AU Small Finance Bank works for low and middleincome individuals and micro and small businesses that have limited or no access to formal banking and finance channels. The bank primarily offers loans, deposits and payment products and services. AU Small Finance Bank was ranked 355 in the list of Fortune India 500 companies in 2019 with annual revenue of ₹ 3,410.87 crore and total balance-sheet assets of ₹ 31,198.68 crore. The bank has benefited from a long-term credit rating of ‘AA- and Stable’ from CRISIL Ratings, ICRA Ratings, India Ratings and CARE Ratings.

Due to its history of functioning as a finance company, almost all the loans disbursed by AU Small Finance Bank were secured unlike most small finance banks that have unsecured loans due to their background in microfinance. This provides lower interest rates than unsecured loans and so the bank has been particularly active in growing its deposits since bank deposits have lower cost than other sources of funds. It has also sought to diversify into savings products such as deposits, payment and transaction banking, distribution of third-party products and additional loan products, thereby positioning it as a holistic financial products and services provider.

Financial Overview
On the quarterly front, the net interest earned by the bank in the first quarter of Q2FY22 came in at ₹ 1,496.45 crore as against ₹ 1,261.11 crore in the corresponding quarter of the previous fiscal – an increase of 18.66 per cent. The total income in Q2FY22 was ₹ 1,772.10 crore, a decrease of 7.92 per cent from ₹ 1,924.53 crore in Q2FY21.

The profit after tax tumbled by 36.94 per cent to reach ₹ 302.05 crore in Q2FY22 from ₹ 479.02 crore in Q2FY21. For Q2FY22 the GNPA percentage was 2.60 per cent as compared to 3.16 per cent in Q2FY21. The CAR ratio rose by 3.77 per cent in Q2FY22 to 1.96 per cent and in Q2FY21 it was 1.88 per cent.

The net interest earned by the bank in FY21 came in at ₹ 4,950.05 crore, an increase of 15.5 per cent from ₹ 4,285.88 crore in FY20. The total income earned by the bank in FY21 is ₹ 6,401.60 crore, an increase of 28.24 per cent from ₹ 4,991.98 crore earned in the previous fiscal FY20. Profit after tax in FY21 increased 73.49 per cent to reach ₹ 1,170.69 crore as against ₹ 674.79 in FY20. The company reported GNPA ratio of 0.43 per cent for FY21 and 0.17 per cent for FY20. In FY21 the CAR ratio was 2.34 per cent whereas in FY20 it was 2.20 per cent.

Sector Overview
The growth in assets under management of Indian small finance banks is likely to show development in the current financial year even though the elevated credit costs may reduce profitability. The assets under management (AUM) of the small finance banks (SFBs) are expected to record a minimal improvement in the growth rate of around 20 per cent in FY22, which is less as compared to the growth rate of 18 per cent witnessed in FY21. However, this would be lower compared to the compound annual growth rate (CAGR) of around 30 per cent before the pandemic. While AUM growth is seen registering an increase, ICRA chose to exercise caution even when providing an outlook on small finance banks as a recent sharp increase in corona virus cases in India could have a disadvantageous impact on Indian economy’s recovery.

The rating agency estimated deterioration in asset quality as experienced during the deadly second wave of the pandemic in 2022, while expressing hope that some degree of recovery could be expected by the end of the financial year of April 2021 to March 2022. Identifying vulnerabilities in the overall risk profile of small finance banks, ICRA pointed out the higher proportion of unsecured loans disbursed by these lenders to customers despite their edge in retail asset classes like vehicle loans, business loans, loan against property and housing finance over the last few years.

From a liquidity perspective, due to the long-term funding support from financial institutions like NABARD and SIDBI, small finance banks have managed to maintain a favourable asset-liability maturity profile. This has been aided by a mix of shorter-tenure assets and a high share of non-callable deposits as well. Since the disbursements have started picking up, it is expected that the pace of growth may improve in Q3FY22, pushing the full-year AUM growth to around 20 per cent though the same would be effect to no major impact from the recent rise in corona virus infections. The rating agency also expects the SFBs to maintain strong liquidity, especially given the vagueness in the industry.

Future Outlook
SFBs have witnessed a rapid growth in their branch network and asset base while maintaining a healthy asset quality and generating high return on assets. This clearly is a validation for the SFB model which has been through numerous hurdles in their brief lifespan of a little over four years starting with demonetisation along with the NBFC crisis and the pandemic. This validation is further strengthened with the RBI issuing fresh SFB licenses under its licensing programme for SFBs and is encouraging newer entrants and urban cooperative banks to take the SFBs route to an entry into the banking sector. The bank expects investments towards strengthening the franchise to continue in FY23. These investments would be to the tune of ₹ 200-250 crore and would likely be a trend going ahead.

AU Small Finance Bank’s focus remains on creating a long-term platform for growth. Hence, the cost to income ratio is expected to remain elevated in the near term. While it is difficult to ascertain whether credit costs have bottomed out given the rise in virus cases, though mild, in the absence of any further severe viral waves, the management expects the credit costs to gravitate to normalised levels. The bank has written off loans worth ₹ 39 crore as the visibility for recoveries was low. It has been able to maintain its asset quality despite tough operating conditions. The secured nature of the book provides relief and ensures the availability of legal recourse to improve recoveries, keeping afloat hopes of asset quality improvement.

The business momentum has picked up from December 2021 and is expected to continue due to the reported fall in virus cases. The management has seen a significant tapering in the restructure requests since the easing of lockdowns and expects the request to come down significantly if the on-ground situation continues to improve. Credit costs are likely to remain elevated as the bank aims to strengthen its balance-sheet. The bank will continue to focus on small-ticket size loans, riskbased pricing and concentrate on secured businesses. The management expects vehicle loans, securities-based lending, home finance, agriculture and business banking verticals to be the key growth drivers moving forward. The management expects loan book growth of 26 per cent CAGR over FY21-24. Hence, we recommend BUY.