About the Company

AU Small Finance Bank is an Indian scheduled commercial bank that was founded as vehicle finance company AU Financiers (India) Ltd in 1996 and converted to a small finance bank on 19 April 2017.

AU Small Finance Bank has a long-standing track record of over two decades of being a retail-focused and customer-centric institution; serving low and middle-income individuals and micro/small businesses that have limited or no access to formal banking and finance channels. The Bank offers a comprehensive suite of loan, deposit & payment products and services.

Q4 FY20 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
  Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 1367 1007 35.75% 1273 7.38% 4992 3411 46.35%
PBT 165 176 -6.25% 273 -39.56% 914 580 57.59%
PAT 122 118 3.39% 190 -35.79% 675 382 76.70%


Detailed Results

    1. The Q4 revenues for the company rose 36% YoY while profits rose 3.4% YoY. FY20 revenues and PAT was up 46% and 77% YoY respectively.
    2. The fall in PBT was mainly due to increased provisioning done by the bank for COVID-19. The provisioning for the quarter was Rs 150 Cr against the normal levels of 30-40 Cr.
    3. The AUM for the company grew 27% YoY, while disbursements for the FY20 period grew 16% YoY and deposits grew 35% YoY.
    4. Retail loans continue to form the majority of the loan portfolio accounting for 84% of total loans in FY20.
    5. Deposits have gone up 35% YoY as of 31st March ’20.
    6. CASA Ratio was at 16% in Q4.
    7. Yield on AUM improved to 14.7% in Q4FY20 vs 14.3% a year ago. Cost of funds fell to 7.7% in FY20 vs 7.9% a year ago.
    8. ROE for FY20 improved by 180 bps YoY to 15.8%. On including the profit from the sale of stake in Aavas, the ROE goes up to 17.9%.
    9. Cost to income ratio for Q4 was at 57.9% vs 58.3% a year ago.
    10. GNPAs declined to 1.7% vs 2% a year ago and NNPA followed a similar pattern and declined to 0.8% in Q4 vs 1.3% last year.
    11. PCR rose to 52.5% in Q4.
    12. CRAR for Q4 was maintained at 22%.
    13. NII for the SFB rose 43% YoY while other income rose 33% YoY.
    14. The company maintained a comfortable LCR of 133% in the quarter.
    15. Rajasthan remains the biggest market for the company with 43% of AUM disbursed and 262 branches in the state.
    16. Opened 16 new branches in Q4.

Investor Conference Call Highlights

  1. The company is starting self on-boarding on fixed deposits through video KYCs from the first week of May.
  2. 58% of AU touchpoints are in green or orange zones.
  3. 63% of business is in rural or semi-urban areas out of which 65% are in green zones.
  4. Only 11% of business is in super metros.
  5. The company received 75% of total EMIs due in April.
  6. The bank has made Rs 138 Cr in provisions for COVID-19.
  7. March contributes around 10-15% of total business in the year.
  8. 47% of people have paid full EMIs while 23% of people have opted to pay partial EMIs.
  9. On average only 10% of customers do not pay EMIs. Thus overall, it can be said that only 20% of customers didn’t pay up EMIs due to COVID-19.
  10. The company added 13000 new accounts in April which is around 1/3rd of normal activity for the bank.
  11. In the term loans for working capital, 93% of customers repaid their dues in April.
  12. Around 25% of the loans have gone into moratorium.
  13. The management believes that there should not be more than 50 bps of delinquency in used vehicles business as compared to the new vehicles business.
  14. The management clarifies that the majority of its vehicle finance customers are single drivers and not fleets and these customers are well distributed enough to bounce back quickly as revival comes.
  15. The total provisions taken are around Rs 500 Cr with Rs 240 Cr on NPA provision.
  16. The total costs for last year were Rs 1400 Cr where 65% were fixed costs.
  17. The bank will continue to maintain high liquidity all the way through June. The management will focus on cost optimization during the next few months.
  18. The management has admitted that the SFB industry has been hit from the trust deficit from the Yes Bank fiasco. The company will continue to maintain and enhance its trust factor with customers and will continue to remain focused on retail loans only.
  19. 94% of NBFC customers have paid off their EMIs. 90% of AUM is secured.
  20. The management stated that the bank requires another quarter to be able to estimate and provide proper guidance on the growth ahead for the bank.
  21. The management is confident that the bank can push on faster into emerging segments than its competitors. This is mainly due to the presence of the bank in various lending segments and the company can scale up operations in whichever sector rises fastest.
  22. In the shopping dhamaka, the bank has also seen digital transactions per customer rise to 8.1 per month from 5.6 in September and the transacting customers have grown 25% since then as well. The number of customers with more than 4 transactions is 1.4 lacs which is 51% up in the same period.

Analyst’s View

AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring themselves early as a commercial bank accepting savings and term deposits. The company made good progress in the quarter in almost all operational metrics and has been performing well in the tough economic conditions and strengthening its brand in the market. The Small Finance Bank industry was hit hard from the Yes Bank situation and the COVID-19 outbreak further deepened the softness in the industry. The bank has done well to keep engaging its customers in such trying times and to maintain enough provisioning and liquidity for uncertain situations. It remains to be seen how the whole COVID-19 situation pans out and what second-order effects will remain in the small finance bank industry from it. Nonetheless, given the company’s good performance record, its robust customer engagement, and its prudent management of its AUM, AU Small Finance Bank remains a good small finance stock to watch out for.


Q3 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 1272.83 894.29 42.33% 1184.21 7.48% 3625.38 2403.6 50.83%
PBT 272.74 146.21 86.54% 216.69 25.87% 748.76 403.68 85.48%
PAT 190.19 95.33 99.51% 171.94 10.61% 552.46 263.57 109.61%


Detailed Results

    1. The Q3 revenues for the company rose 42% YoY while profits rose 99.5% YoY. 9M revenues and PAT was up 51% and 110% YoY respectively.
    2. The AUM for the company grew 37% YoY, while disbursements for the 9M period grew 23% YoY and deposits grew 72% YoY.
    3. Retail loans continue to form the majority of the loan portfolio accounting for 81% of total loans in 9MFY20.
    4. Deposits have gone up 63% YoY as of 31st Dec ’19.
    5. CASA Ratio was at 17% in Q3.
    6. Yield on AUM improved to 14.7% in Q3FY20 vs 14.3% a year ago. Cost of funds fell to 7.8% in 9MFY20 vs 7.9% a year ago.
    7. ROE for 9MFY20 improved dramatically by 420 bps YoY to 17.4%. On including the profit from the sale of stake in Aavas, the ROE goes up to 19.9%.
    8. Cost to income ratio for Q3 was at 53.2% vs 60.6% a year ago.
    9. GNPAs declined to 1.88% vs 2.01% in last quarter and NNPA followed a similar pattern and declined to 1.01% in Q3 vs 1.14% in last quarter.
    10. PCR rose to 46.8% in Q3.
    11. CRAR for Q3 was maintained at 19.3%.
    12. NII for the SFB rose 46% YoY while other income rose 52% YoY.
    13. The bank added 16 branches in Q3.
    14. Q3 saw an investment of Rs 525 Cr into the bank from Camas Holdings (Temasek) for warrants conversion.
    15. The company maintained a comfortable LCR of 95% in the quarter.
    16. Rajasthan remains the biggest market for the company with 41% of AUM disbursed and 249 branches in the state.

Investor Conference Call Highlights

  1. The management has clarified that the drop in disbursement yields in vehicle loans in Q3 was mainly due to the festive season and December discounts and the change in the product mix of more loans to new vehicles.
  2. The management has guided that it expects the company’s NIMs to remain stable at current levels of going forward.
  3. The management has identified SME and NBFC lending as a good area for the company. It expects good growth in disbursements of 28%-30% for the next 2 years after which the company is expected to try and go to the next level as a universal bank.
  4. The management maintains that the company has not seen any challenges in collection or asset quality in its vehicle loans business. This is mainly because the vehicle loan segment covers all types of vehicles including tractors and the market stress is currently only in the LCV and HCV segment which is not that big for the company yet.
  5. The average ticket size for a personal loan is around Rs 1.69 Lacs and all personal loans have been issued only to existing bank customers. This is mainly done to analyze repayment patterns and also to provide insights on existing customer behaviour.
  6. The company has taken various steps to tighten credit criteria for borrowers like increasing margin requirements, etc to improve asset quality and reduce defaults.
  7. In the vehicle loan business, the company is lending to 80% new customers and 20% to existing bank customers.
  8. The company is targeting to open 200 new branches by March ’22, with the majority of them being in semi-urban and rural areas. The management expects this expansion to be done prudently so that the cost to income remains stable and does not rise too fast.
  9. The management has mentioned that their vehicle finance business in states other than Rajasthan is still low and it expects it to take at least 6 months to one year to gain meaningful traction in this segment.
  10. For their deposit segment, the company is not targeting a big number of customers but it is trying to concentrate on big-ticket customers like in urban markets, the company is opening customers at a minimum deposit of Rs 25000.
  11. The management has mentioned that it does not have any specific target for PCR and is fine as long as the provisions meet the losses.
  12. In the SME loans, business, around 90% of all loans have been made out to new customers. The management feels confident that going forward this segment book will become the biggest book for the organization.
  13. The company is looking to grow at a rate of 25% per year with AUM growth of roughly 35% each year in the next 2 years. The management has indicated that the company will raise additional capital whenever it feels the need to do so to stay on track for the above targets.

Analyst’s View

AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring themselves early as a commercial bank accepting savings and term deposits. The company made good progress in the quarter in almost all operational metrics and has been performing well in the tough economic conditions and establishing its brand in the market. The company has done well to expand steadily on almost all of its loan segments particularly SME loans. It remains to be seen whether the company will be able to stay on course to become a universal bank in the next few years and achieve the ambitious growth targets proposed by the management smoothly. Nonetheless, given its commanding presence in Rajasthan and its steady expansion of all business segments into big states of Gujarat and Maharashtra, AU Small Finance Bank remains a compelling SFB stock for all investors.


Q2 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q2FY20 Q2FY19 YoY % Q1FY20 QoQ % H1FY20 H1FY19 YoY%
Sales 1184.21 805.89 46.94% 1168.33 1.36% 2352.54 1509.3 55.87%
PBT 216.69 140.2 54.56% 259.32 -16.44% 476 257.47 84.88%
PAT 171.94 91.41 88.10% 190.32 -9.66% 362.26 168.23 115.34%


Detailed Results

    1. The revenues for the company rose 45% YoY while profits rose 55% YoY. PAT was up 88% YoY.
    2. The AUM for the company grew 38% YoY, while disbursements grew 40% YoY and deposits grew 72% YoY.
    3. Retail loans continue to form the majority of the loan portfolio accounting for 79% of total loans and 95% of all loans are secured with an average ticket size of Rs 5 Lacs.
    4. Disbursement yields improved by 40 bps YoY to 14.7% while cost funds also went up 10 bps YoY to 7.9% in H1FY20.
    5. Cost to income reduced to 56.6% in H1FY20 vs 60% in H1FY19.
    6. Wheels disbursements saw YoY growth of 27%.
    7. MSME disbursements grew 32% YoY.
    8. The gross NPA ratio came at 2% while net NPA was at 1.1%. The company maintained a PCR ratio of 43.9%.
    9. The company maintained a healthy CRAR ratio of 17.9% and a CASA ratio of 16% in Q2.
    10. The company opened 10 bank branches in Delhi, Haryana, and Rajasthan in the quarter. They maintained their good rural and semi-urban penetration with 62% of branches from these regions.

Investor Conference Call Highlights

  1. The bank has migrated to daily tallying of NPAs since Q1 and this is helping it keep track of collections and delinquencies very closely.
  2. The incremental cost of funds was much favorable to the company at 7.45% which is an improvement of 10bps above 7.55% in Q1.
  3. The bank also maintains a very healthy LCR of 95% with additional liquidity buffers in place.
  4. The management sees a drop in the cost of money of at least 20-30 bps in the coming 6 months.
  5. The management conveyed that it was merely acting conservatively when it raised the provisioning in the current quarter above 1%.
  6. The company has been increasing headcount mainly to step up new divisions like housing loans and others.
  7. The company is providing 6% in SA and 7.65% in the overall FD book.
  8. The management maintains that the number of channels for their used vehicle finance business has gone up significantly to almost 2000 from 700 a year ago which has helped them expand this division at a good pace. Also, the company has good penetration in smaller towns and rural areas which has also helped them source underserviced regions possibly.
  9. The company believes that it is in firm control of its NBFC activities and the industry should recover going forward.
  10. The management stick to its previous guidance of maintaining the AUM growth of 35%-40% for FY20 and the launch of newer products should help them maintain this growth momentum for a few years.
  11. The management has maintained that it is concentrating on the used vehicle finance more as compared to new vehicle finance as the yield in the former is higher and by far there is a higher demand for used vehicles in the market as compared to new vehicles.
  12. The management maintains that home loans will remain a key retail area for the company and it will be looking to take advantage of the current challenging HFC market and make a name for the company by growing this division. Currently, home loans form 10% of retail assets and are of an average ticket size of Rs 25+ Lacs and provide a yield of around 13%.
  13. The management has yet to decide on how to use the money generated from the reduced tax regime in the long term but it should get clear on this strategy in the next 2 quarters.
  14. The company will continue to keep the residual stake in Aavas and will use it whenever it is in need of raising capital. The current value of the stake is around Rs 800 Cr.
  15. The management is comfortable with the current PCR mainly because of the high level of secured lending that the company has done.
  16. 65% of the company’s term deposits are bulk deposits and around 40% of all term deposits are non-callable.
  17. The company has only 5 accounts as NPAs now and it is expecting recoveries in 3 of these in the coming quarter.

Analyst’s View

AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring themselves early as a commercial bank accepting savings and term deposits. The company made good progress in the quarter in almost all operational metrics and has been performing well in the tough economic conditions and establishing its brand in the market. The company’s focus on core banking products and secured lending provides good assurance of prudent risk management on the company’s part and its improving operational metrics provide good evidence of operating leverage kicking in. It remains to be seen how the company will establish itself in its new product categories which already have many incumbent players. Nonetheless, given the growth momentum that the company has sustained for so long and the improving performance of their core banking division, AU Small Finance Bank has established itself as a good small finance bank.


 

 

 

Q1 2020 Updates

Financial Results & Highlights

 

Standalone Financials (In Crs)
Q1FY20 Q1FY19 YoY % Q4FY19 QoQ %
Sales 1168.33 703.41 66.10% 1007.44 15.97%
PBT 259.32 117.28 121.11% 176.44 46.97%
PAT 190.32 76.82 147.75% 118.23 60.97%

 

Detailed Results

    1. The revenues for the company rose 66% YoY while profits rose 56% YoY. PAT was up 147.75% YoY as it also had the additional income from the sale of a small stake in Aavas Financiers Ltd.
    2. The AUM for the company grew 44% YoY, while disbursements grew 40% YoY and deposits grew 100% YoY. The company added 1.6 lac new deposit and loan accounts in the quarter.
    3. Retail loans continue to form the majority of the loan portfolio accounting for 80% of total loans.
    4. Disbursement yields improved by 90 bps QoQ while cost funds declined 10 bps QoQ to 7.9%.
    5. Wheels disbursements saw YoY growth of 27%.
    6. MSME disbursements grew 32% YoY.
    7. The gross NPA ratio came at 2.1% while net NPA was at 1.3%. The company maintained a PCR ratio of 40.5%.
    8. The company mobilized more than Rs 850 Cr in retail term deposits.
    9. The company maintained an AAA-rated vehicle loan pool of Rs 1336 Cr.
    10. The company divested 0.8% of their 7.2% stake in Aavas Financiers Ltd resulting in a pre-tax income of Rs 77 Cr.
    11. The company also launched a 3 in 1 Bank, Trading and Demat account in association with Motilal Oswal Financial Services.
    12. The company maintained a healthy CRAR ratio of 18.6% and a CASA ratio of 19% in Q1.
    13. Operating expenses as a % of revenues fell to 3.8% from 4.8% last year.
    14. Cost to income ratio in Q1FY20 was at 59.6% from 60.9% in Q1FY19.
    15. The loan book growth for the retail assets was 49% while MSME loan book grew 37% YoY.
    16. The company total assets grew 61% YoY with advances growing 51% YoY and investments growing 124% YoY.
    17. The company opened 10 business correspondent banking outlets in the quarter. They maintained their good rural and semi-urban penetration with 64% of branches from these regions.
    18. The company also boasted increasing debit card users (which doubled in the past year) as well as penetration (72% vs 62% last year).

Investor Conference Call Highlights

  1. The proportion of CASA and Retail deposits came in at 46% while the proportion of individuals, HUFs, sole proprietors and partnerships rose to 35% from 31% a year ago.
  2. The company is targeting a cost to income ratio of 52-53% in the next 2-3 years. They are also targeting a fixed asset to total asset ratio of 3.25% by FY22.
  3. The management believes that RoA levels of 1.8-1.9% are achievable by FY ‘21,’22 from the current level of 1.4%.
  4. The company sees the used car lending segment to get bigger in the future. The traction in India on new to used is around 1:1.2. in developed markets this ratio goes on to 1:3. With the advent of multiple online used car marketplaces like CARS24, CarDekho, the company expects this segment to expand even faster than before.
  5. Given the current auto sector slowdown since one year ago, the company shifted its focus on the vehicle loan business from new vehicles to used vehicle business highlighting a good strategic call on part of the management.
  6. The company expects to see an improvement in ROE from Q4FY20 onwards. This is mainly because the company has started building a high yield book and these changes in the asset mix will take a few quarters to bring up the overall yields.
  7. The management has maintained that they will maintain current spread levels till the time that they remain a small bank. They also see the cost of funds coming down in the next few years.
  8. The company has yet to decide how to build their liability franchise as a unit. They have a lot of other sources of money like securitization, refinance, etc, which are separate from their predominant sources of savings and term deposits. They are still figuring out how they should proceed in building their banking institution and hope for some clarity by the end of the year.
  9. The company’s primary target right now is to build a low cost, long term stable retail term deposit book.
  10. The management has mentioned that they will not be raising branch liability at a higher cost and will not be pushing for aggressive branch expansion at higher costs.
  11. The management is committed to maintaining a liquidity cushion of 8% to 10% of their assets at all times.
  12. The management has identified the cost of deposits, people retention, and the economy as the three major challenges for the company to reach its goal of Rs 70,000 Cr in assets and 5 million customers by FY22.
  13. The management explained that they had done securitization in this year because they were getting better costs with securitization as compared to PSLC (Public Sector Lending Certificates) and will continue to do so if the situation persists.
  14. The management has identified 60-70 basis points as the level of sustainable credit cost in the next 5 years.
  15. The management clarifies that they are not undertaking undue risk by expanding in the used vehicle loan segment. They assert that risk-adjusted IRR is better in this segment and thus they are pursuing it.
  16. The management has clarified that the reason that incremental yields are going up is due to product mix change in the yields and because they were increasing their lending rates in the declining Agri segment and the retail segment.
  17. The company is yet to decide on any further stake sales in the near future.
  18. On a full-year basis, the company is expected to keep RoA at current levels and they should start seeing improvements in it once the company breaks even in-branch banking.
  19. In the savings accounts, the company operates at 5% to 6% rates which come out to be 6.1-6.2% on average. In retail term deposits, the company offers a peak rate of 8.1%.
  20. The management has maintained that the main drivers for RoA would be reducing OpEx to revenue over time. They are targeting OpEx levels of 3.7-3.8% this year and expect to reach 3.2-3.3% by Q4FY22.
  21. The company has reassured that they have no exposure to Reliance Home Finance, Dewan Housing Finance and other such entities and their book is mainly filled with small and mid-sized credits.

Analyst’s View

AU Small Finance Bank has been a fast-rising player in the banking and microfinance sector in the country. The company has differentiated itself from other microfinance players by structuring themselves as a commercial bank accepting savings and term deposits. They have also pivoted to used vehicle finance from new vehicle finance showing that they are ready to make wholesale changes in their operations when required. The management admits that the company is going through a transitionary phase and all of the company’s operational goals and mechanisms have not been set in stone yet. Given the current economic environment, the company has delivered exemplary performance and their focus on not over-expanding their branch banking at higher costs and keeping operational low has helped them maintain a stable RoA which is expected to rise once their branch banking operations break even. It remains to be seen how long the company will be able to maintain its growth momentum or what commercial or business focus area they will settle on. Nonetheless, given its good recent performance and the healthy loan book with stable NPAs, AU Small Finance is a good stock to watch out for, especially for any investors banking on the theme of microfinance.

 

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