AU Small Finance Bank Ltd

NSE:AUBANK

Ladies and gentlemen, good day, and welcome to AU Small Finance Bank Q4 FY '25 Earnings Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Prince Tiwari, Head of Investor Relations. Thank you, and over to you, Mr. Tiwari.

Yes. Thank you, [indiscernible] , and good evening, everyone, and welcome to AU Small Finance Bank's earnings call for the financial year and quarter ending March '25. We thank you all for joining the call this evening. On today's call, on behalf of the management, we have our Founder, MD and CEO, Mr. Sanjay Agarwal; our Executive Director and Deputy CEO, Shri. Uttam Tibrewal Ji; our Deputy CEO, Mr. Rajeev Yadav, and other senior members of the management team, along with the IR team.

Like last quarter, we'll start today's call with a 15 to 20 minutes opening remarks by Mr. Gaurav Jain, President Finance and Strategy, highlighting the bank's performance, positioning and outlook. We'll follow the opening remarks with 40 to 45 minutes of questions and answers from the participating analysts and investors. For benefit of all participants, so that we can take everyone's question, we would humbly request everyone to keep the number of questions restricted to two and join back in the queue in case you have further questions.

For any data keeping questions, you can always reach out to the IR team post the call, and we can always come back to you. With that, I'll now request Gaurav Jain, President Finance and Strategy, to share his opening remarks. Gaurav, over to you.

Thank you, Prince. Good evening, everyone. I extend a warm welcome to all participants on this call. We thank you for your continued trust in AU as we close FY '25, a year marked by continued transformation and resilience. FY '25 unfolded against a backdrop of challenging macroeconomic conditions, Intra GDP growth, while still among the highest globally, moderated to around 6.4% as per latest RBI estimates. The monetary policy environment remained tight for most of the year with the RBI maintaining a cautious stance amidst persistent core inflation pressure.

Elevated interest rates weighed on both credit demand and cost of funds. Additionally, systemic liquidity remained tight for most of the year, leading to increased competition for deposits across the banking system. Evolving regulations also added to the complexity of the operating environment. For a young and relatively smaller bank like AU with a growing but still maturing liability franchise on SFB platform, these conditions are particularly demanding, testing our agility and strategic focus yet.

Despite these macro and structural headwinds, AU delivered a strong and well-rounded performance across key financial and operational metrics, reaffirming the strength of our retail-centric and granular business model and execution discipline. We delivered strong growth with our deposit book growing by 27% year-on-year versus banking sector deposit growth of 10.1% and our loan book grew by 20% Y-o-Y versus banking sector loan growth of 10.8%, despite degrowth of 18% in our unsecured book.

We delivered an ROA of 1.5% despite significantly higher credit costs in MFI and credit cards and after strengthening our provision coverage by making an accelerated provision of INR 150 crores. Our EPS grew by 19% and book value per share grew by 23%.

Now let me talk about our business in some more detail. Our deposit base crossed INR 124,000 crores this year, growing by 27% year-on-year. If we take into consideration the fact that we also replaced Fincare deposits of around INR 4,000 crores, which were at higher cost, underlying deposit growth comes to 30% plus.

This growth was delivered whilst optimizing a number of other variables, including managing our cost of funds, which came in at 7.07% versus our initial guidance of 7.2% to 7.25% and concluding our OpEx and marketing costs. Our branch profitability improved with 49% of our branches, which were in existence in December '23 becoming profitable in Q4 versus 25% a year back. And all the other parameters like CASA ratio, LCR and CD ratio remain in good shape. We have also reduced our peak deposit rates by 25 bps, both on term deposit as well as on savings deposit post the last rate cut by RBI.

I think this performance by our deposits business in a tough environment is a testament to the potential of our growing deposit franchise, which we have developed over the last 8 years. We have invested in all the key aspects. We established a strong segmented product proposition backed by cutting-edge digital channels with all the cross-sell products capability, including our recently launched AD1 remittance products, and comprehensive wealth and insurance distribution platforms. We have pan-India distribution with the inclusion of Fincare deposit branches in the South.

In FY '26, we plan to open around 70 to 80 new branches, mostly in the top cities and enable around 75 existing asset centers in district and tehsil headquarters to start taking deposits.

Now moving on to our asset franchise. Credit demand was slower during the year, and the banking system credit growth dropped to 10.8% in FY '25 from the highs of 16% last year. In this backdrop, we have performed well with our loan portfolio growing by 20% year-on-year, reaching INR 115,000 crores, which is around 1.8x of the system growth rate.

Our growth was led by continued strong traction in our secure segments, which include retail secured assets and commercial banking and form 87% of our total loan book. Retail secured assets grew by 21% and commercial banking grew by 32% year-on-year. Both these businesses performed strongly in FY '25 with continued strong growth and sound asset quality and we have a long growth runway as we expand these businesses to South India, utilizing Fincare touch points.

Our retail secured assets book, which includes [indiscernible] mortgages and gold loan has a vintage of over 2 decades and is a unique combination of scale, growth, high yield and strong asset quality. We have a very strong right to win in this business with our deep distribution and underwriting expertise in formal segments in semi-urban and rural areas, strong operational processes and correction framework and robust people practices.

In Commercial Banking, we have developed a full product suite and tech capability over the last 8 to 10 years and book has scaled consistently with strong growth and asset quality. Commercial Banking business is important from a liability franchise perspective as well and generated around INR 12,000 crores of deposits. We are moving this business to Mumbai this year, which will provide an opportunity to stitch this business even more closely with our deposit franchise and other asset businesses.

On the unsecured book front, our unsecured book degrew by 18% for the year. Micro finance segment continued to face industry-wide deleveraging and our MFI book declined by 17%. However, we believe we are nearing the end of this corrective cycle with continued improvement in collection efficiency, which touched 99.2% in March and 98.7% for the full quarter. There could be some impact from MFIN guardrails coming into effect. However, the industry has been tightening for almost 3 to 4 quarters now, and it's a short tenure loan. So we expect positive momentum to continue in the next year. On the regulatory front, the MFIN guidelines around responsible lending practices and borrower indebtedness caps are structurally positive for the industry and will increase industry discipline.

Additionally, the CG SMU credit guarantee scheme provides a critical backstop for eligible MFI loans, enabling us to lend more confidently to the underserved segments whilst mitigating downside risk. Nearly 100% of our Q4 disbursements would be covered under the guarantee, taking our overall portfolio covered to 36% by the end of this year.

Going forward, we will aim to have most of our incremental disbursements covered under the scheme, and coverage on the overall book will increase to more than 75%. This will greatly reduce volatility of credit costs. MFI remains an important book fulfilling our [ SMF ] obligations. While we will remain disciplined in growing this book, we see potential to cautiously scale as the operating environment improves.

Our credit card book has gone through a period of recalibration in FY '25, declining by 19%. We believe the corrective actions we have taken tightening underwriting, rationalizing credit limits and sharper portfolio monitoring have laid the foundation for more sustainable growth. The segment offers strong product economics and cross-sell potential as we scale our deposit customer base. We see the credit card business as a strategic lever for both fee income and long-term customer stickiness and remain committed to building it sustainably over the medium term.

However, we need to be patient as it will take 1 to 2 years for our credit card franchise to turn around. In terms of our strategic initiatives, we continue to stay committed to our strategy of building a retail-focused bank, primarily serving self-employed and MSME customers, with a largely fixed rate book and a strong deposit franchise. We have consolidated all the businesses, except credit card under the leadership of our Executive Director and Deputy CEO. Both Commercial Banking and MFI business will now operate out of Mumbai, which will become the base for all our key businesses lines over the next couple of years, with Jaipur focusing more on back-end operations. We will continue to focus on branch expansion, attracting urban deposit customers and driving cross-sell. Tech and digital will continue to be an important driver, both as a channel as well as a tool to drive productivity.

Over the years, we have already built Tech Infra to process customer data available through various digital public infrastructure like account aggregator and Digilocker. We are now working on adding AI layer on top of our data lake to roll out various use cases at scale to drive workflows, automation and cross-sell. This will help drive long-term structural increase in efficiency.

Finally, as you know, we have applied for universal banking license in September. Our application is under review by RBI. We remain in regular touch with the regulator, and we are hopeful for a timely evaluation.

In terms of profitability, we delivered profit after tax of INR 2,106 crores for the year and ROA of 1.5% despite significantly higher credit costs driven by stress in MFI and credit cards book. In Q4, we also made an accelerated provision of INR 150 crores primarily in unsecured to strengthen our provision coverage. This provisioning was over and above our provision policy and our coverage on unsecured businesses is now almost 100%.

We also did a lot of work this year in improving our operating efficiency, and our cost income ratio reduced from 64% in FY '24 to 57% in FY '25. This was driven by tight control on overheads and marketing costs, lower credit card issuance volume and synergies from Fincare merger. As we look towards FY '26, we see benefits of policy tailwinds with interest rate cuts, better system liquidity and change in policy stance from neutral to accommodative.

Credit growth outlook is also improving and strength in unsecured segment is reducing. However, we are in a new normal environment where post COVID gains are over. GDP growth is likely to be range bound and some sort of macro or geopolitical uncertainty could be business as usual. In this uncertain environment, we are watchful and are not providing any specific guidance for FY '26. That said, based on our performance in FY '25, which was a really difficult year, we are confident of continuing to do well next year. Second half of the year is likely to be stronger than the first as credit costs in unsecured subsides and cost of funds begin to move downwards.

Over the medium to long term, we believe our franchise has the potential to sustainably deliver ROA of around 1.8% with business growth of 2 to 2.5x of nominal GDP.

In closing, FY '25 was a tough year, but we stayed the course. We grew, we corrected where needed, and we continue to strengthen the foundations of a forever bank. As we have said earlier, it takes about 10 years to build a bank. We have completed 8 years and are confident that the foundations we are laying today will create a stronger and more sustainable AU tomorrow.

As a young bank, our business model is well established. Our team is vintage and stable, and we are present across the spectrum for our retail and MSME customers. In this uncertain macro environment, we may have small hiccups here and there. But we will navigate these challenges and continue to do what is right in order to build a strong and sustainable forever bank.

Sanjay Ji, would you like to add anything?

No, Gaurav. I think -- thank you, Gaurav, Good evening actually. So no, I think you have summarized well. I will only add that tough time maybe it did well. Throughout the year, last financial year, GDP was under pressure. Inflation was there, the broken momentum, liquidity issues, I would say, very low business confidence. And at AU, I would say, our deposit franchise really done very well in terms of building up the liability, the cost around it, the OpEx around it.

The only missing item would be around the [indiscernible] where our CASA would have dipped, but that is a general industry phenomenon. I would say our secure retail asset also performed very well in terms of growth, in terms of ROE, in terms of credit cost, little elevated because of the whole GDP not performing up to the expectation. OpEx level in everything, I think it's one of the books that we all are very proud of.

Commercial Banking, again, has gone to the size and scale now, and they're also performing well in terms of every aspect. I would only say that macro finance business again a right business maybe at a wrong time. But it's a very -- I would say, it's fulfilled our whole inclusive agenda of banking, it gives us SMF book. It has not negatively impacted us. But of course, we had a high expectation around that book that should give us 3% to 4% ROA, but I think it's gone to its own cyclic, I think cycle. And so this year, I would say quarter 3, quarter 4, we all are hoping that it will come back to the old numbers.

Credit card is more, we have taken a lot of corrective actions. We want to understand it more gradually. We have hired a very senior guy to underwrite to understand the portfolio and all those things. So maybe this year, we want to go to that learning curve. And -- but we are very serious enough to build that whole unsecured portfolio, which is so or a high-yield kind of numbers.

Other than that, integration is going very well. I would say we also want to focus on gold because Fincare has done that business very well over the years. So we want to capitalize on that business. And of course, recent RBI, Secular and the whole narrative around is that it favors bank. So you want to capitalize that whole positioning.

Our ROA is 1.53, which is maybe lesser than what we guided you last year. But we have done the accelerated provision of 10 bps. So somehow, we want to be really -- I don't want to be very -- I want to play around our balance sheet. We want to be very honest on our numbers so that it does not color -- we don't want to get it colored by the whole aspect around it. So idea is to really communicate to you people, very honestly that this 10 bps is on the NPA, so that our provision coverage goes upto a 70% level and its NPA on the unsecured assets gets 100% covered, right? So we don't want to do anything one-off -- that's the way we are thinking at AU. We want to treat every thing -- we want to communicate everything so that it remains business as usual, right?

So overall, very happy. I would only say that this year, this financial year looks more in control in the sense that interest rate cycles are now coming down. Credit cost, of course, remain around 1.3%, including the [indiscernible] provisions, but should be now on a normalized basis this year, which we are thinking in the range of 75 bps to 85 bps. Next year, it may be on the higher side of the curve, maybe 85 bps. So we'll get advantage in our credit cost next year. But NIMs can be in pressure because still -- the real benefit of interest rates coming down will only get materialized maybe in quarter 3, quarter 4.

So we have to handle that headwind around NIM. But overall, very happy to see the entire ROA [indiscernible] . Our OpEx is in well control. Last year, it was phenomenal. And honestly, we got from 63 to 56. It's not an easy. So we had some kind of, I would say, low-hanging fruits but we really want to build more distribution. We want to do some kind of marketing activity. So -- but idea is to really keep it below 60%. But we'll see how we do it during the course because we are all expecting that this financial year, we should get promoted to Universal One. So there can be a special effort for marketing around that. So very -- I would say, tough time, played well. This year, we look more confident.

Thank you so much, Gaurav, over to you.

Yes. Thank you, sir. Thank you, Gaurav, and thank you, Sanjay Ji. We can go to the Q&A now.

[Operator Instructions] The first question comes from the line of Renish with ICICI Bank.

Congrats on a good set of numbers under in this challenging time. So sir, my first question is actually on the NIM, right? So post the 50 basis point of rate cut, we have already seen large and mid sized bank out of rationalizing the SAR rates. So are we not planning to raise in line with the system?

So, Renish, we already have that on our term deposit rates by 25 bps. We already have rationalized our saving buckets, saving account buckets. So we are not giving now -- the peak rate around SEBI did now 7% instead of 7.25%. To further go down, we'll require some more actions from some of our competitors because our CASA is below 30%. So -- and we are not enjoying a space of around 40%, 45% in that book. So it's not easy for us to cut rate below 7% as of now. But let's see how the entire industry plays their whole game in this year, and then we take the action around it.

Okay. So I mean, is it right to assume that we might lose this scenario, I mean, in terms of affording higher rates to sort of accelerate the CASA acquisition rather than rationalizing rates. I mean, is that the strategy?

No. No. I think -- at AU, we don't want to be driven by a lot many things which is one-off. We want to build [indiscernible] basis the brand, basis the services which we offer to our customers. So we haven't played last year also, to be honest, because many banks are pricing their saving account better than us, but we played our -- we played our whole strategy that will play around -- more around acquisition, building the relationship, cross-selling it. So we want to be in that zone than anything else.

Got it. Just a follow-up on that. So maybe cost of fund might not come down, but the 50 basis point of the repo rate cut being eventually inside our [indiscernible] rate book in near term, right? So broadly, our name should sustain between 5.5% to 6% in FY '26? Or how I should look at it from current develop [indiscernible].

So if you ask me, as of now -- if you ask me as of now, the next year, the lever is on the credit cost. The challenge is on NIM. So, as of now, it's so difficult to predict whether we'll go down by 10 bps or 20 bps or 30 bps, but there will be a challenge on the NIM. But do you want to add on something? Yes.

Yes. So just because this question is generally -- I'm sure, Renish, this is the top of the line question for everyone. So maybe I just wanted to [indiscernible] put some more context into it. So Renish, if you see our Q4 margins, now primarily on the -- as far as the components of the margins are concerned, our cost of funds went up by about 7 basis points, right? We started the quarter at about 706 and we ended up at about 714 on an average from Q3 to Q4. But there was also an impact of number of days, right? So to that extent, that got negated in this particular quarter, we didn't really see any impact from the cost of funds?

But there is also -- so that's on the cost of fund side. But on the asset side, we did have a mix change that's been going on given that there have been -- our unsecured has gone down by 17% in the full year and 10% in the quarter. And MFI is typically a higher yielding asset.

So due to that mix change, we had about 5 to 6 basis points of impact, right? As the rate cut on the asset side on the mix because of the NIM side, right? As far as the rate cut impact is concerned, as you rightly said, 30% of the book broadly is variable REIT book. That impact, we haven't seen as yet. Because typically it takes about a quarter for the entire impact to come through, so maybe 1 basis point, but otherwise. So that's the breakup of the NIM for Q4. So if you see, we have gone down from about 5.85 to 5.79, right?

Now, as far as next quarter is concerned, again, our next financial year is concerned, again, the same factors are going to play out. So 30% variable rate book does get impacted in terms of repricing of the repo rate. Currently 50 basis point cut, if something more happens, it'll have an impact, right? As far as cost of funds are concerned, we have taken a cut on 16th of April, 25 basis points as Sanjay Ji said, on savings as well as on the term deposits, right? And you know that we are a price taker in that business given our small finance bank, not a universal bank.

So to that extent, we obviously have to depend on how the market leaders are doing. So given that we got some space, we have brought down our peak TD rate from 8% to 7.75%, and we have brought down our peak savings rate from 7.25% to 7%.

Right? Going forward, we'll have to see how the market reacts and basis that we can take a call. So to summarize, one, is there a yield pressure? The answer is, yes, right? Now it also depends on how quickly we can turn around on the MFI side on how the business mix changes on the positive side going forward? And how quickly the flow-through happens through the deposits on the rate cut side, right? When the rates started going up about 3 years back, we had guided that it takes about 12 to 15 months for the full impact to pass through. Same way on this cycle also. In this cycle also, typically, you will see maybe 6 to 9 months when you'll start seeing the impact, as Sanjay said, Q3, Q4. And for the full impact to go through, obviously, it will take 12 to 15 months. So that's the broad story on NIM. We don't want to put a number out there because a lot of factors are -- as I said, it will also depend on how quickly the rate gets transmitted through the system on the deposits.

Got it. Sir, just -- I mean, just a broad calculation. I say 30% of variable book debt reprice it of 50 basis points lower. So we'll have a 15 basis point of impact and we have already cut our SAR rate by 25 basis points. So in a way, we have already negated that. So then ideally, first half '26, there should not be any major new impact. Am I missing anything here, sir?

So it's not a direct calculation, Renish. Obviously, there's the impact of the daily averages, right? How the portfolio is moving? How the deposit is priced. So we are not -- I mean we have -- as we said in the opening remarks also, we're not putting out a guidance because there are variables. We have told you all the constructs of the NIM, right? Now it's up to you for assuming. We'll come back and report to you as we have more data point.

Got it. Got it. And just a clarification. So, Sanjay sir has mentioned about credit cost remaining at 75 to 85 basis points. So that number is for '26 or '27?

So that's the long-term average that we are talking about that as a bank, we want to position ourselves given the change in the asset mix, that 75 to 85 basis points is on the total average assets, right? It's not on loans. It's on total average assets, 75 to 85 basis points. And as we said, that's a long-term average. For next financial year, we are expecting that we might be on the higher end of that curve. Given that there is some more credit cost has to flow through on the unsecured business in the first half.

Sir, what is the corresponding number for this year?

1.3.

Got it. So basically, we are expecting maybe 30 to 40 basis points of improvement in credit costs in FY '26.

[indiscernible].

Next question comes from the line of Kunal Shah of Citi Group.

Firstly, sorry, again, on credit cost front, so when we look at the accelerated provisioning that seems to have been done largely towards the GNPAs and making 100% provisioning on the unsecured. But when we look at it overall in terms of the SMA pool as well as when you indicated that MFIN2.0 guardrail is also getting implemented, and there is a proportion of book which is linked to it. So would that mean that credit cost over the next couple of quarters will still continue to be elevated? I think you made that comment in Q4 post the Q3 earnings on that credit costs will be elevated in MFI for almost like 3-odd quarters. So any change in that guidance post this accelerated provisioning?

So Rajeev or Kunal, so the deputy CEO, I think he can comment on this.

Kunal, so fundamentally, no new change as I said last time. We expected that the Q3 and Q4 of last year would be the highest level of credit cost as a quarter basis. And then they will gradually decline from a Q1 to a Q2 perspective. Obviously, some degree of excluded provision that we have taken will be helpful in those quarters. But fundamentally, MFI will take 2 more quarters to reach near normalcy as we would see. And I think that should pretty much come from a credit cost perspective in Q3 to Q4 kind of a time frame.

Operationally, what is the one that we drive as a team is we saw that the Q2 and Q3 were the worst quarters operationally and Q4, as we had expected in a typical cycle of microfinance, which typically goes from 9 to 12 months, we saw Q4 improving. The only delta in the Q4 quarter was Karnataka, which happened out of our segment. First 9 months Kanataka was perfect.

Even that has been handled well and pretty much is now on its path to normalcy. So as you can see from data, we had a very reasonable quarter 4 and with March being exceptional, and we believe that quarter 1 and quarter 2 operation will be stronger. And from a credit cost perspective, we should see that in Q3 and Q4 of this financial year.

So Kunal, just to add on here. Because what we have done this year is around 1.3 kind of credit cost on total assets. And we are expecting that our credit cost can be around 85 bps for next year. It's basis that first 2 quarters will have an elevated cost on macro finance and credit card. But quarter 3, quarter 4, we are expecting strong pullback. And that is why the overall cost of credit has gone down -- should go down for the year, right? And we expect our real book, the secured asset book, commercial banking, largely in the same range but better than this year than the last year, right?

Yes. Got it. Got it. So when we look at it for full year, maybe the MFI credit cost was almost 7.75% and credit card was almost 11%, and now we know that SMA pool is 3.7%, maybe almost like, say, 70 basis points improvement compared to that of Q3, but this SMA pool will still flow through. And if we look at maybe the collection efficiency from the SMA bucket, what is the kind of slippage and what is the kind of -- if we have to particularly touch upon these 2 particular segments, not the overall credit cost, then how would it pan out maybe compared to 7.75% and 11%?

Look, I think we have collection efficiency improving across the buckets, right? And as Rajeev Ji mentioned, March was particularly strong. So we are expecting this positive momentum to continue in the new year as well, right? So depending on where we end up with that sort of -- that will determine the trajectory of improvement in maybe sort of Q2 onwards.

Not just to clarity, credit card, like you are seeing around 11% -- 12.86% for this year. It should be around 6% to 7% for next year and MFI also should be around 3, 3.5%.

And just to add to that, right, another variable in the mix is the percentage of book which is covered under CGFMU, right? So we would probably have about is 35%, 36% of the book as on March already under CGFMU with all of the Q4 disbursement being covered under CGFMU, right? So this percentage will only increase going forward. And we expect more than 75%, 80% of the book to be covered under CG FMU. So as I mentioned earlier in my opening remarks, this will reduce the volatility around credit cost. So where as we will incur some costs for the scheme, but we will benefit in bad times by the downside protection afforded by the scheme.

Got it. Got it. And one more question if I can squeeze in.

Yes. Sorry, yes.

Go ahead, Kunal.

Yes. Sir, the other one was on the universal license you indicated that you are in communication with the regulator. So what is the kind of time line which we can draw? Obviously, now the committee said they are evaluating. So when can we expect the universal bank license?

I would say this calendar year.

This calendar year. Yes. Okay.

Decision should happen in this calendar year.

Next question comes from the line of Piran Engineer with CLSA.

Congrats on the performance in this turbulent environment. Just 2 questions from my end. Firstly, out of this INR 894 crores slippage this quarter, how much would be from the wheels portfolio? And what was it versus, say, last quarter?

So we give -- we don't give individually portfolio-wise data. But having said that, it's -- I like we have said in the presentation as well that Q4 was a strong quarter and followed the historical trend. So every business saw reductions in slippages, barring maybe 1 or 2 on unsecured side. So yes, so we also definitely saw a very strong fourth quarter.

Okay. Okay. And also just a clarification in the initial comments, opening comments, Gaurav, said it will take 1 to 2 years for the credit card franchise to turn around. So by that, you mean breakeven? Or what exactly did you mean by that?

Yes. No, no. Of course, I think the expectation around our credit card or maybe unsecured business is to generate at least maybe 4% to 5% ROE, right? So -- and the first level to get to that to have the breakeven. So I strongly expect to break even by next year, which is the '26, '27, and from '27 onwards, it will start giving us some money. Of course, not to have a 4%, 5% ROE in '27, '28, but at least give us some kind of positive profit from that year onwards.

Mr. Engineer, please rejoin the queue for more questions. Next question comes from the line of Pritesh Bumb with DAM Capital Advisors.

Sir, 2, 3 questions. One is on the bill deposits. What I see as a trend is that we have grown strongly on bill deposit, despite CD ratio being comfortable. Any strategic intent there?

Not really. I think the whole system was like this. The [indiscernible] and SAR remain under pressure, right? And we also have grown our retail deposit, right? But I think the heavy lifting has been done through wholesale deposits. So I think our ALM, our CD ratio, LCR, all remain very strong. So nothing is specific. I think it was a flow of business.

So the follow-up question was on, say, example, REG, you have grown about 16% quarter-on-quarter. It looks like that we've done wholesale borrowing in terms of deposits and we lend to REG where there is slightly lower spread. So I'm just trying to think why would we grow a little higher in some of these businesses where the market is so tight?

No, no. My friend, REG business is only 3% of our overall assets. I know but overall, it's just 3% of our overall assets, right? So we never had an intention to grow REG out of the contact side, and that business is doing well.

If you ask me the real estate is doing well, our home loan book is also [indiscernible] perform well. So it's a linkage kind of thing for us. And it's a very granule. We don't do INR 100 crores, INR 200 crores kind of funding, right? It is very maybe around INR 40 crores, INR 50 crores kind of funding. So we are doing from last 10 years. So it's a very well established franchise. And we just want to be like this. So I think the correlation between wholesale deposit and wholesale lending, I don't think is that way.

Mr. Bumb, please rejoin the queue for more questions. Next question comes from the line of Anand Swaminathan with Bank of America.

I have a couple of questions. The first question, when you get your Universal Bank license, does this guidance around 2 to 2.5 the system growth still hold. And why I ask this is none of the other universal banks are growing beyond 20%, 21%. There's no doubt about your capacity to grow. Just wanted to understand will there be any self-imposed limit or regulator is okay with you growing 25%-plus even after becoming a Universal Bank. And number two, when do you next expect to raise capital? Will this be this financial year or next financial year? I just wanted some clarity on that.

So Anand, there is nothing as such rule or compulsion from anybody to grow in that kind of numbers, neither the regulator has stopped us. It is basis on the as of now positioning of us that we are around INR 1.5 lakh crores of assets. So we are not too small, not too big for next 2, 3 years. We can grow in the range of 25%, right, because -- so it's not related to universal to very honest. It's related to our size. So once we reach maybe around INR 3 lakh crore or INR 4 lakh crore, we might say that you want to grow in the range of 20%, right? So I think it depends on the size and the opportunity. I personally believe that last 3 years remained very tough for all of us.

Now the entire narrative from the regulators, from the government of India, entire -- I know there are short-term uncertainties, but I see a lot of money, things coming back to Indian economy in the next maybe 18 to 24-month period. We are well settled and we have built up our franchise in India, As CD ratio -- everything has remained so good, honestly. So -- in this time, if opportunity is there, and it's under our entire metrics, then we will want to grow in the level of maybe 20%, 25%. That's our, I would say, endurance, right?

This year also, we told you that we want to grow around 25%. But if market never permitted us, it just has grown 20%, right? So -- but our capacity is there, capability is there, approach is there, product is there. So it does depend how the market behaves. So that is our overall strategy. So it's nothing that somebody is pushing us or there is an agenda to grow like this. So we will always grow sensibly and reasonably.

And Alan, just to add, right?

The 2 to 2.5x is not that of system credit growth, that's of the nominal GDP growth.

Sure, I got it. Yes. No, thanks, Sanjay. I appreciate the clarification. Just wanted to make it clear, and I think it helps the investor base as well to fully appreciate kind of there are no restrictions in its capacity that is driving growth. And that's why...

And for the capital raise, Anand, we want to, I think, want to relate that with our universal license decision.

Yes. So it will be after Universal Bank license you get. That's when you will decide that's what you mean?

That's our desire.

Okay. Fantastic. Sanjay, just in this context, since you are talking about the macro as well, what is the on-the-ground feedback your feelings because you speak the most or on the ground to the business community. The underlying macro in India is weak as well, and there's a lot of uncertainty with global export tarrifs, et cetera. What are you hearing from the ground? What is the feedback you're seeing? How do you expect kind of the business decisions to be made in the next few quarters, will help us kind of go kind of how things are on the ground?

So Anand, it's mix. It's mixed feeling. If you ask me, things are looking good from last maybe 2 months. Once -- and I'll give you reasons. One, the regulator has become more, I think, more growth oriented. Their body language, their narration has helped us a lot. Their action is speaking louder than what they were telling. You can see the LCR norms, you can see the entire liquidity positioning -- you can see that they are saying that growth has to come back.

The government of India is also pushing a lot many things. I think in last March, the CapEx has gone up. So I think, overall, I would say, things are -- coming now to normally, first of all. Second, I think anything which we were expecting that India will shine and India will grow in the range of 7.5%, 8%, it is not there. So people have now become more rational. People have become more cautious, right?

And in this time, whoever want to build business is sure about the entire spectrum, right? And so that's why in [indiscernible] Gaurav very categorially commented that any kind of euphoria has gone away. And when euphoria goes away, the realistic is there, right? The reality is there. So in my opinion, in this sense, we are more safe because we know the reality. So that is coming up.

I would say some sectors like real estate, tourism, the hospitality. I would say, the entire tech, tech-related businesses are doing phenomenally well, right? So now as a banker, we need to figure out our zone, our positioning the way we want to be in, right, and build our business. So it's not that it's very gloomy, nothing is happening. But neither is that it's very growing or it's very rosy, right? So we need to play our inning well. And so overall, I'm optimistic than looking for some excuses and all those things. So that's my sense. You want to add on something -- anybody of you, right.

That's my sense, Anand.

Mr. Swaminathan, please rejoin the queue for more questions. Next question comes from the line of Nidhesh Jain with Investec. Mr. Jain, please go ahead with the question.

First question is on credit card, but all changes we have made on the credit card in the last 12 months? And when should we start seeing increase in new credit card sourcing?

Yes. So Nidhesh, we have taken a complete cost correction. So as we commented earlier that we were doing digital underwriting for lending the credit card. So now we have put a lot many gated condition to understand customers better in the sense that what is this income level? What is this identity address kind of stability in all those things. We also have not allowing customers to misuse the card or many of the expense like rent or utility and all those things.

So we have -- so that also have not allowed our customers as our spend has come down from INR 1,900 crore or INR 2,000 crore per month to INR 1,000 crore level per month side. And we have also brought in the specialized credit guy from the industry to help us to build underwriting and the portfolio there. We also have not want to source through the DSA channels and all those things. We do want to really build more on our ETB, right?

So addition to bank customers. So these are the things we have already done it. That is why the issuance has come down from 40,000 to 45,000 label to now 10,000 level. But you will see that issuance coming up to the maybe around 20,000 cards, [indiscernible] , maybe post September, right? So we want to take another 2 quarters to really make it completely repair, right, and then build it.

Sure, sir. Second question is just on cost to income. So last year, we have done phenomenal job on cost to income, and probably we would have cut a lot of cost, we would not have invested the way we were investing in the past. So how do you see cost-to-income panning out over from a medium-term perspective? And do you see that when you will get leeway from a P&L, you will start investing for future in terms of branding, et cetera, the way we were doing in the past?

So Nidhesh, largely, we haven't stopped any kind of investment to be honest. I would only highlight 3 key items: one, maybe a marketing cost. So we deliberately hold it because we want to now tie up with our universal license base, so that helps us there. Second, expansion. Last year, we got the expansion from Fincare. So we want to build more businesses through that distribution. And third, of course, tech. So we have taken some pause in our tech expansion so that we really understand because large many things are coming intact on a daily basis.

So other than these 3, we haven't have any kind of specific, I would say, actions to really manage our costs. Rather, we were very I would say this year onwards, and I was so hope to say you that my cost to income might not be around 57% this year, but should not go up above 60% also because we want to build more distribution. We want to do some kind of tax investments so that we become -- we remain future ready, right? So other than that, I think on marketing, again, will be tied up with our universal license zone, so yes.

Mr. Jain, please rejoin the queue for more questions. Next question comes from the line of Nitin Aggarwal with Motilal Oswal Financial Services Limited.

I have a few questions. Firstly, on the ROA guidance that we have for FY '27. So Sanjay Ji, you gave this guidance like last year, and we had a very turbulent FY '25, and there will be some impact of new guardrail in 1H, as you mentioned. So how comfortable do you feel to make this guidance? Do you foresee any risk to this? Or do you think that the risks are evenly poised, so what's your assessment on that?

Nitin is having good question. So last financial year, which is now '24-'25, we struggled with both credit cost and the NIM. Still, I would say our performance is as per the guidance. We have accelerated our provisions by 10 bps, which was much required. So of course, the lending at 1.53 instead of 1.6%, so we really performed last year also as per the guidance, in my opinion.

Second, this financial year, I believe credit cost will be more in control. Rather, we can have a challenge on NIM, right? But I think you know that interest rate factors are now coming down, we are well prepared in terms of anticipating the Indian economy and its effects. So next year, which is '26-'27, I am pretty sure that what we have guided you in a year back, should get utilized. But I don't want to, again, hold myself to around that guidance. It's our endurance, right? But these are things because if you see our ROA sheet, we're around 5.7%, 5.8% this year too. We are around -- Other income is around 1.8%, 1.9%. It will go further up because we are sending our cross-sellability through other product lines.

Our cost to income is around 4.25%. It might have -- might stable here, right, might not go down for a couple of years. But I'm seeing huge, again, I would say, reduction in my credit cost from 1.3 to 0.85, 0.9 next year, further going down 0.75, maybe in '26-'27. So I then put all together, if you put all the nets in place, we are above 1.8%, right?

So -- and of course, now there will be a market challenge. There would be a lot many things, which may be unknowns, which we do not know as of now, but we need to play our innings, right? And -- but I think you've to appreciate that whether the bank has the capability, bank is on the right track, bank is not under any kind of pressure or any kind of issue which we are not able to solve, it's our business numbers with 10 bps here and there, but we largely remain on course and of course the universal license.

Right. And sir, second question is, any color as to what would our LCR be factoring in the -- like a revised LCR guidelines that came in yesterday, I'm asking because AU Bank is relatively lower and so should like any benefit on that should be very much...

New guideline, I think we haven't done our working, but it is close to 120.

Sorry, Yogesh, you want to add on?

Yes. So these guidelines are better than RAP guidelines. And I think we are just evaluating but it should be neutral to positive impact on us.

But we are fine with that LCR because, again, we are doing our business, many of banks know their own risk management. So as for our risk management anything around 115, 120 is good enough for us. So for me, Nitin, because we need to build our own risk management around that, right?

But we are not expecting any negative impact.

Yes. For that from the guidelines, right?

But the entire LCR expectation from AU Bank is around lower what market operates, right?

Yes. Mr. Aggarwal, please rejoin the queue for more questions. Next question comes from the line of Rohan Mandora with Equirus Securities.

Sir, firstly, the 30 basis point Q-on-Q decline in incremental yields that you have seen. So did you have any component of year-end discounts or in the secured business? Or is it purely a function of a change in loan mix?

That's on the disbursement, right, Rohan?

Yes, on the disbursement.

That's more a function of mix, nothing else. There is obviously some amount of year ending on the secured side. There might be a slight bit element of that, but I think it's largely a function of mix.

Sure. Okay. Secondly, on the wheels, the growth that we have seen in this quarter, just wanted to understand how did the growth shape up across subsegments on wheels?

So I think this quarter, we saw some strong uptake on the tractor side. Given the seasonally the rains has been good. So I think this quarter, the tractor definitely outperformed. Even on the used vehicle segment side, I think we have picked up. So yes, I think everything else [indiscernible] there. New car sales were a bit flattish. But I think on the use side, on the tractor side, 2-wheeler, we have gone deliberately slow, so we haven't really pushed that product. [indiscernible] you want to add on.

So overall, Q4 was flat, but second half of March, there were some traction towards vehicles as [indiscernible] industry. So that has contributed. Otherwise, Q4. As such, what we expect from Q4 as a bounce it was not there, it was flattish. And these are the all sales numbers also, but I think second half of March was [indiscernible] that's the reality.

Sure. And lastly, on Slide 11, the credit cost that we have given segment-wise, what is the denominator used here because if you have to compare it across the last 3, 4 presentations that you've given, how should we look at that number?

So, Rohan, everywhere, we have used the gross loan portfolio or the AUM, which you can -- the average of that, the average AUM for the period.

For the quarter or for the year.

In the AUM or the GLP, gross loan portfolio, you can find on Slide #38, every quarter.

So for FY '25, when you're giving this 11% for credit cards or 7.5% for MFI, so it would be average of March versus March or December versus March? Just [indiscernible] .

This is for the full year. Since this is for the full year. Right? This credit cost is for the full year. So you would have taken the average of all the 12 months.

Next question comes from the line of Tanuj with JPMorgan.

So a couple of ones. So one is at what level will you be comfortable in growing your MFI book in line with your overall loan growth? Because if you're guiding for a 20% to 25% perhaps loan growth, then starting from second half of FY '26, could we see MFI book growth materially pick up for the share to increase from the current 6% level?

And also in that context, in FY '26 in particular, how will you look to manage your PSL compliance on SMS and the weaker section? So that's the first question.

And second one is that even with you doing CGFMU across most of the incremental disbursals, does that initial guidance that you had said that you would want to maintain a 3% coverage on your overall MFI book still hold or all incremental disposals?

I think a very good question. So I think we will continue to have 3% credit cost provision irrespective of our coverage under these government schemes. But by this year and we expect 80% of our book to be covered under this scheme. So I think by what just Gaurav commented that we want to protect our future from any downside risk from the credit cost of this business. And that is why we are more bullish now that this is not a very. I would say it's a very important strategic change, which we have brought in, in the macro finance book. So that is there.

But overall, we've already said that unsecured piece won't be going above 15%. And in that -- and MFI will not go above 10%. So we want to be in that numbers for maybe the next couple of years.

And Tanuj, if you see the secured business, even in this year has grown by 23%. Right? The commercial doing 30% plus and retail secured doing about 21%, 22%. So honestly, even if the other businesses, the unsecured businesses, which you mentioned, they were down 17%. If they're just neutral also, we should broadly start scaling up. Right? So we don't really need to be very aggressive on those businesses to achieve a 20%, 25% kind of range.

So [indiscernible], just to follow up on that, if you are saying that your overall loan growth remains at 20%, 25% range in MFI, I'm assuming gradually goes from 6% to 10%, and you're saying that perhaps after second half, like if you see the systems stabilize, you are not against growing MFI credit card book at a 25%, 30% range also given the system [indiscernible].

Yes. But with the cap of overall 10% of our overall book from MFI, maybe another 5% unsecured. That's the overall cap.

Yes. And it's a long runway, Pranuj, because MFI currently is about sub-6, right? And the other businesses are also growing at about 25% -- 20%, 25%. So for MFI to jump from 6% to 10%, they'll have to grow at like 40%, 50% cliff. Right? Which I'm not really sure is something that we are envisaging. So I think the growth on the MFI will be very measured, if I can say that way.

Okay. Got it. Understood. I don't know PSL requirements, does this provide some [indiscernible].

We are compliant this year. So FY '25, we are good on all our subsegments as well as on the overall PSL. For next financial year, it will be more a function of how the disbursement picks up and how the book behaves.

So Yogesh how much percentage this year SMF has been done by microfinance book?

50%.

Yes. So 50%, our SMA book obligation has been done by macro finance book.

Next question comes from the line of Rahul Jain with Goldman Sachs.

Sanjay Ji and team, I think, congratulations, it's been a tough year for you all. And despite that, your numbers are decent. I just had a few questions. Maybe just to start with the credit cards, the loan loss provision guidance, which you said this is still some residual pain that you'll clean up in the first half. But in this quarter, you already made 150% sorry, INR 150 crores of provisions. So how much more is less -- I mean if you can just share some more color on SMA-1, SMA-2 book in the credit card space. So that's one.

Second is, I have another question on NIMs, but let's just discuss this first before I move to the second question.

Yes. So Rahul, like this year, due to the accelerated provision on credit card book, it is around 12.5 kind of credit cost. And I expect a credit cost of credit card on a on a very normalized basis should be in the range of 5% to 6%. Next year, this financial year, '26 -- '25-'26, I expect my credit cost on credit card should be around in the range of 6% to 7%. .

So the idea is to bring my credit cost assumption on a book level on a normalized basis from this year onwards. So that's why we have done this accelerated provision so that the normalized credit cost should be there on our balance sheet from this year onwards. So I don't think that any specific provision is acquired from here onwards to really arrest or any additional credit card costs.

So the first half would mainly be any elevated credit costs that might be there would mainly be because of the MFI and lower recoveries in your secured retail asset business, which is seasonal in nature. Is that a fair assumption?

Yes. Yes, yes. So I think already still very early days. Honestly, we are just talking on 22nd April. So March has been very promising in all aspects, be it recoveries and around secured assets or be recovery around macro finance or credit card. We as a team has pulled up a lot many good things in March. So still to -- I won't able to comment that how the quarter 1, quarter 2 can be. But an overall yearly basis, Rahul, I strongly believe that our credit cost will be substantially lower what we have done in this whole financial year.

Got it. Makes sense. And according to the slippages that we had in this quarter, can we say that we are now at the peak, and therefore, [indiscernible] behind us. And even in the first half itself, we should start seeing the improvement because the collection efficiency in the MFI business has almost normalized as shown in the presentation. Credit card is getting to the normalized run rate. So fair to assume that slippages have peaked in this quarter?

Again, Rahul, honestly, I'd love to say that, and we'd all want to. But as we said, it's a Q4 right now, and there is definitely always a year ending phenomena that plays out. And as you rightly said earlier in your question that Q1, Q2 typically has a seasonal impact. So honestly, I would like to resolve my comments on that and just make it out. But definitely, I think in all the businesses, we have seen an improvement in slippages. And hopefully, we can come back to you. If there is no major heat wave or other things, then hopefully, we should be there. But let's just wait out for Q1, Q2.

Some seasonality always plays out. I don't want to really comment that.

Makes sense. And the third question is on the margins. So your wholesale deposits and your uplifting portfolio, by and large, is similar in terms of the proportion of their respective portfolios. You've seen a sharp reduction in the wholesale rates in the market. So your commentary still remains the same on margins that first half will be under pressure because of the EBLR linked portfolio, et cetera. But this is similar to what we had heard from you all in the fourth quarter because since then the RBI has taken some serious measures to bring the rates down in the wholesale market. So what's making us so cautious that the margins will still remain under pressure in the first half. Technically, the pressure should be easier or lower after the RBI measures and not the same as in the fourth -- in the third quarter, I'm sorry.

And also, as I said in the first question, primarily, there was an impact of higher cost of funds. The cost of funds moved by about 7 basis points during the quarter. But as I said, that got negated for this quarter because of the number of days, right? So there was a definitely offsetting factor there, that might not be available in the next quarter. So to that extent, there'll be -- that impact is still to play out, and that's where we are cautious. But otherwise, I completely agree with you that given the steps that the regulators have taken the kind of liquidity measures that has been infused and the fact that we have already taken [indiscernible] that's on both the savings as well as on the term deposits. And hopefully, wholesale prices -- wholesale deposits start pricing much lower.

We are confident or we are hopeful that as we progress further into the year, we'll be in a much better position, given that 70% of our asset side is still fixed rate and typically liabilities gets priced earlier. But as I said, we still -- I would like to reserve again the guidance to see that how the flow-through happens.

Sorry, I just have a correction, right? On the credit card stuff, right? So next year, our credit cost is going to be elevated in the first half. And in the second half, it will probably start approaching towards most normal -- more normalized level that Sanjay Ji mentioned of 6% to 7%, right? But as a result, my full year credit cost on credit card will remain elevated above a normalized level.

Thank you. Mr. Jain. Please rejoin the queue for more questions. Next question comes from the line of Ashlesh Sonje with Kotak Securities.

Sir, first question is on asset quality. Last quarter, I remember you had indicated some elevated slippages in the small transporter segment within vehicle finance, especially in XUV and SUV. Wanted to check with you how is the situation there in that portfolio as of now?

And secondly, if you can share some color on collections in the microfinance portfolio in the month of April. Whether that 99.2% number in March has gone down to, let's say, INR 96%, 97% or it is still holding up, let's say, around above 98%.

So, yes, I'm Uttam here. So first of all, for the small transporters, small commercial vehicles can say that, loading vehicles -- the situation has improved. The collection has improved throughout the Q4 and more of Feb and March was good collections and good efficiency there.

Yes. And even on the MFI side, whatever early trends that we have seen. I think things are holding up. But Rajeev Ji, do you want to comment on.

So Ashlesh, obviously, March is always one of the strongest months. But as you know, this was coming out of a credit cycle. So it's not basically meaning that this is a normalized state. So I am fairly confident that Q1 will be better than Q4 you have the breakup of all the numbers across quarters and Q4 was 98.7%. So I expect clearly Q1 to be better, and we are tracking April quite well at this point of time even to the earlier months.

Sir, if I can just squeeze in one more question. On the SAR REIT book, can you just break out what proportion of the SAR book is with depositors who have balances below 1 lakh -- below 3 lakh, below 5 lakh? If you can do that.

This is too official. Ashlesh, we can -- you can write to us and we can respond to this because this is -- we don't have this data backup [indiscernible]

Thank you. Next question comes from the line of Sailesh Kanani with Centrum Broking.

Sir, my question is with respect to MFI first of all. We have around 16% of our book, which is impacted by the [indiscernible] . So in case the customers are regular in [indiscernible] general industry is going towards that. What is our view on that?

Salesh, you are not very clear or audible. Can you just repeat the question?

So my question is, is it better now?

Yes, better.

Yes. So approximately 16% of the portfolio is impacted by MFIN 2 guardrails, right? So in cases where these customers are kind of regular in repayments, are we considering transitioning them to an individual loan product? Because incrementally, industry is also seeing a momentum towards that. So how are we viewing that?

So Shailesh, Individual loans is something which we have to strategically debate and come back and see whether we sort of want to migrate to that and as a general microfinance proposition because it's not just about the impacted customers, it's not a broader construct. I would just say that we are working with our customers. We have -- these customers have been well educated over the last 1 or 2 quarters for the guardrails, which have been launched and what we were transitioning to. My personal belief is that the people who are still good with us and not delinquent or NPA, even if they are impacted, a lot of them are having capability or conviction to repay their loans. So generally, we're not seeing, at least as we are tracking April impact on the industry guardrail changes at this point of time.

Yes. Just to clarify further on that, Shailesh, we don't do -- we only do joint lending -- JLG model today. We don't do individual model on the microfinance portfolio.

Yes. Yes, I'm aware of that. I was just thinking -- I mean, I was just wondering if we are considering that as a product.

Not just to react to the situation, but improving business model thinking and as obviously, there is a learning and improvement that we need to make out of this overleverage cycle. So the model will evolve, but I wouldn't say as a reaction to a guardrail impacted customer. So -- and microfinance models typically evolve over a few years. They don't -- they're not reactive to a situation because ultimately, there are a large number of workforce, customers, and there's a lot of signs behind what has been built over the last 2 decades. So I would say some evolution would happen, and we'll work that through in this financial year.

Thank you. Mr. Kanani, please read on the queue for more questions. Next question comes from the line of Pritesh Bumb with DAM Capital Advisors.

Yes. So one question was on the gold loan NPL side. So that has been inching up a bit. Now, it is more than 1%. Anything on that because we're seeing a little bit of NPLs there.

Yes. So some NPLs have come through, through the transition. As you know that we had a merger last year and [indiscernible] used to do this business. So we have seen some transition NPLs, but hopefully, we should get back in control going forward.

But the yield is also very high on that book. So risk reward kind of outcome.

So if I want to take a follow-up on that, so are we changing anything in terms of tenure of the mix, the approach to that business or...

Which one?

The home loan side. Are we seeing transmission there towards more higher ticket size, more better...

No, no, no. We want to be the affordable housing space. And AU was doing as a structure, we were doing more of, I would say, low -- high-end customer in low income growth. And Fincare was doing more low income growth in the southern side. And in this whole transitioning, you know that there are always a challenge around team retention and all those things, but it's not that high. The absolute amount is very low. So I'm not too worried. So we will bring entire factors of AU in those markets also.

Ladies and gentlemen, due to time constraints, we have reached the end of question-and-answer session. I would now like to hand the conference over to Prince Tiwari for closing comments.

Thank you, [indiscernible] , and thank you, everyone, for joining the call today and for your questions and all the support through the years. In case you have further questions, kindly reach out to the IR team, and we'll be more than happy to respond.

We are signing off on behalf of AU Management. Good night.

Thank you so much.

Thank you. On behalf of AU Small Finance Bank Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.