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What the record says.
AU Small Finance Bank reported Q3 FY25 PAT of INR 528 crore, down 7% QoQ due to elevated credit costs in MFI and credit cards. Net interest margin declined 23 bps QoQ to 5.9%, impacted by higher investment mix and adverse loan mix. The bank maintained strong cost control with cost-to-income at 54% for Q3, but expects full-year ratio of 57%-58%. Loan growth guidance was revised to ~20% for FY25, with secured assets growing 23%-24% and continued degrowth in MFI and credit cards. Management highlighted green shoots in MFI collection efficiency (98.7% in December) but expects elevated credit costs for 2-3 quarters. The universal bank application process is progressing with RBI's new advisory committee. Key risk: prolonged stress in MFI and credit card portfolios could delay ROA recovery to 1.6% guidance.
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Guidance to track
- Total loan portfolio expected to grow around 20% for FY25, with secured assets growing 23%-24% and continued degrowth in MFI and credit cards.
- Full-year cost-to-income ratio expected to be 57%-58%, with Q4 seasonally higher expenses.
- Despite elevated credit costs, the bank expects to be within striking range of 1.6% ROA for FY25.
- Even after recent rate hikes on savings and FD, cost of funds expected at lower end of guided range.
Risks flagged
- MFI credit cost of 5.4% annualized YTD and elevated SMA pool of 4.4% may persist for 2-3 quarters, impacting overall profitability.
- Credit card book declined 9% QoQ with credit cost of 9.2% YTD; corrective actions may take 1-2 quarters to show results.
- Tight banking system liquidity and persistent inflation may keep cost of funds elevated, impacting NIMs.
- Analyst raised concern about sequential asset quality changes in secured book; management confident but GDP slowdown could affect informal segments.
Key quotes
- We got a few things wrong, which included not getting digital underwriting correct, higher reliance on card-for-card sourcing, and issuing higher credit limits.
- This is not an event risk. This is more about over-leverage and maybe irrational lending to that sector. A lot much has been arrested in the last two quarters.
- Our cost to income has to go around 55% in the next two years. And it has to be based on a best-case basis because there are quite many things we don't control as we move forward.
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