ESAF Small Finance Bank Limited — Q3 FY26

ESAF Small Finance Bank Limited Q3 FY2025-26 Earnings Conference Call https://www.youtube.com/watch?v=SOiNRSOKOss Published: 3 months ago

0:00 Ladies and gentlemen, good day and welcome to ISAF Small Finance Bank Limited Q3 FY26 earnings conference 0:08 8 seconds call. As a reminder, all participant lines will be in the listenon only mode and there will be an opportunity for you 0:15 15 seconds to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then 0:24 24 seconds zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over 0:31 31 seconds to Dr. K. Paul Thomas, MD and CEO of Isaf Small Finance Bank. Thank you. And over to you, sir. Thank you. Thank you. 0:40 40 seconds Good morning everyone and welcome to ISAF Small Finance Banks Q3 0:47 47 seconds and 9 month FI26 earnings call. On behalf of board and management, I thank you for joining us today and for your 0:56 56 seconds continued interest in ISA Small Finance Bank. Joining me today are my colleagues, Mr. George K. John, 1:03 1 minute, 3 seconds executive director, Mr. GP, EVP and CFO and Mr. Harry Wal uh EVP at 1:12 1 minute, 12 seconds ISAF Small Finance Bank. Financial inclusion and serving the underserved has always been the bedrock of our 1:20 1 minute, 20 seconds purpose. At the same time, we are consciously strengthening the balance between social impact and sustainable 1:28 1 minute, 28 seconds profitability. Over the last few quarters, our strategy has been focused on building a stable, diversified, and 1:37 1 minute, 37 seconds resilient balance sheet supported by disciplined execution and risk calibration. Our focus on secured 1:45 1 minute, 45 seconds lending, granular deposits, operational efficiency and technology service delivery is now clearly visible in our 1:53 1 minute, 53 seconds financial performance. Accordingly, we have intensified our focus on diversified product portfolio, 2:03 2 minutes, 3 seconds strengthening our distribution network and enhancing service delivery standards. This has allowed us to deepen 2:11 2 minutes, 11 seconds our presence across rural, semi-urban and urban geographies while serving a wider customer base with greater efficiency and consistency. 2:22 2 minutes, 22 seconds We are building a sustainable and diversified lending business with a shift to secured lending which is important for long-term stability and 2:31 2 minutes, 31 seconds growth. At the same time, we are adding new customers and increasing our connect with existing customers to further bolster our CASA and deposit base. 2:44 2 minutes, 44 seconds A key highlight of our transformation journey has been the successful aggregation of our MARG strategy which 2:51 2 minutes, 51 seconds represent MSME, A for agree, R for retail and G for gold loans. This strategy reflects our 3:00 3 minutes deliberate shift from unsecured to secured lending. At Isaf Small Finance Bank, our operations continue to be 3:08 3 minutes, 8 seconds guided by strong governance, transparency, and responsible banking practices. We remain committed to 3:15 3 minutes, 15 seconds maintaining high standards of disclosure and risk display while creating sustainable long-term value for our 3:23 3 minutes, 23 seconds stakeholder shareholders. At the same time, we stay true to our founding purpose of fostering financial inclusion 3:31 3 minutes, 31 seconds and enabling meaningful socioeconomic progress across the communities we serve. On the macro front, the Indian 3:40 3 minutes, 40 seconds economy continues to witness strong growth momentum driven by robust domestic demand, lower inflation and 3:49 3 minutes, 49 seconds structural reforms related to GST and labor. This has been supported by various regulatory and monetary measures 3:58 3 minutes, 58 seconds announced by RBI that are largely aimed at strengthening the entire banking 4:03 4 minutes, 3 seconds sector. Q3 FI26 business numbers mark a turnaround in our business performance 4:10 4 minutes, 10 seconds with part turning turning to positive territory and both gross NBA and net NBA reducing significantly. 4:20 4 minutes, 20 seconds We will continue to work towards improving cost efficiencies and strategically increase dispersements especially across secured lending 4:29 4 minutes, 29 seconds segments like gold, MSME, mortgages, vehicle and agree loans. This strategic shift is strengthening our asset 4:36 4 minutes, 36 seconds quality, reducing portfolio concentration and de-risking the business thus enabling sustainable 4:44 4 minutes, 44 seconds growth. I now invite our executive director Mr. George K Jones to take you through the next segment. 4:53 4 minutes, 53 seconds Thank you po sir and good morning everyone. Let me begin by briefing out the recent regulatory backdrop. 5:02 5 minutes, 2 seconds In his December monetary policy committee meeting the RP reduced the report rate by 25 points to 5.25 5:10 5 minutes, 10 seconds percentage while maintaining a neutral stance. This marks a cumulative rate cut 5:16 5 minutes, 16 seconds of 125 basis points during 2025 supported by a sharp modernization in 5:23 5 minutes, 23 seconds inflation and a stronger than expected economic recovery. The overall macro 5:29 5 minutes, 29 seconds environment remains conducive with improved visibility on credit growth across the system. It is expected to benefit the bank sector meaningfully. 5:41 5 minutes, 41 seconds Moving to our bank performance in Q3 FY26 reflects a clear improvement across 5:47 5 minutes, 47 seconds key parameters. The quarter witness a return to profitability supported by normalization in assess quality and 5:56 5 minutes, 56 seconds significant reduction in NPA levels. We also saw sequential improvement across core business metrics underscoring the 6:04 6 minutes, 4 seconds effectiveness of strategic action undertaken over the past few quarters. 6:09 6 minutes, 9 seconds As of 31st December 2025, a total business flat 44,636 crores, we're 6:16 6 minutes, 16 seconds seeing a healthy Euronian growth of 10% compared to 40,76 crores last year. During the same 6:25 6 minutes, 25 seconds period, gross advances grow by 13%age while reported by 7%age reflecting 6:32 6 minutes, 32 seconds balanced growth across both side of the balance sheet. Dispersements witnessed strong momentum. 6:39 6 minutes, 39 seconds regarding a growth of 134 percentage Y and 46% quarter on quarter. This growth 6:47 6 minutes, 47 seconds was broad based across segments and slowly reflect the strength of underlining demand 6:54 6 minutes, 54 seconds as well as the successful execution of our strategy to peer towards secured highquality lending. We have made 7:01 7 minutes, 1 second meaningful progress in reshaping our portfol strategy. The micro finance book has 7:09 7 minutes, 9 seconds been rationalized from 10,000 crores in Q3 FI25 to 7,500 in Q3 FI26 7:16 7 minutes, 16 seconds enabling a greater shift towards secured and better rated assets. Transition is enhanced portfolio of clients reducing 7:25 7 minutes, 25 seconds volatility and supporting sustainable long-term growth. As a part of DSP strategy, we have defined a focus growth 7:35 7 minutes, 35 seconds framework called MAL detailed in the slide five of our investor presentation. 7:40 7 minutes, 40 seconds Mark is a subscript signifies direction and this framework reflects our clear strategic path towards securing secured 7:48 7 minutes, 48 seconds lending led by MSME agree retail and gold loans. This shift is concerning portfolio quality and long-term resilience. 7:58 7 minutes, 58 seconds An addant of this portfolio transaction is that all the constant segments under mark framework exhibit significantly 8:06 8 minutes, 6 seconds lower NP levels. Together the segments now account for nearly 60%age of our total advances. Among them, Golan have 8:15 8 minutes, 15 seconds emerged as a standout performer, recording a strong growth of 18% year on year and 16%age quarter on quarter 8:23 8 minutes, 23 seconds reflecting sustained demand from our rural and sen customer base. 8:29 8 minutes, 29 seconds As a result of this focus strategy, secured asset now constitutes 60%age upon those brands compared to compared 8:37 8 minutes, 37 seconds to 45%age a year ago. We remain firmly on track to achieve a stated target of 70% secur portfolio by March 2027. 8:47 8 minutes, 47 seconds The steady improvement in the secured asset mix of last five quarters clearly validate the effortness of our strategy 8:55 8 minutes, 55 seconds in building a more resilient highquality portfolio with stable and lower cost. 9:01 9 minutes, 1 second Our dispers our distribution footprint continues to be one of our strongest differentiators. 78 banking objects 79 9:10 9 minutes, 10 seconds ATMs over,42 customer service centers and 31 in social business correspondents across 24 states and two territories. 9:20 9 minutes, 20 seconds This enabled the customer uh reach and connect. 9:24 9 minutes, 24 seconds On the micro finance front after nearly five quarters of industrial wise stress we are now seeing clear sign of stabilization 9:32 9 minutes, 32 seconds efficiencies have improved sequently and the overall oper operating environment had begun to normalize supported by 9:40 9 minutes, 40 seconds better borrow behavior and tighter industry display. 9:45 9 minutes, 45 seconds We are leveraging this improving macro environment to a focused and calibrated strategy for our MFI portfolio. This 9:54 9 minutes, 54 seconds includes example the kunga meetings process to strengthen field engagement targeted acquisition of uh quality uh 10:02 10 minutes, 2 seconds customers structured graduation from group loan to individual loans a calibrated risk approach to fresh dispersements and intensified follow up on the legal accounts. 10:13 10 minutes, 13 seconds We remain confidence upon stability and long-term potential of our micro portfolio. With improving collection 10:20 10 minutes, 20 seconds times, discipline under contracting and a strong risk management framework, the portfolio is now on a much stronger footing. As we continue to execute on 10:29 10 minutes, 29 seconds our priorities of building the balance sheet, enhancing asset quality and improving operational efficiency. We are well positioned to deliver sustainable 10:38 10 minutes, 38 seconds and high quality growth supported by continuous investment in technology product and customer service. The improvement in business performance 10:46 10 minutes, 46 seconds during the quarter clearly reflects the impact of all progress strategic actions and discipline execution. The 10:54 10 minutes, 54 seconds bank has returned to proximity during the quarter supported by a meaningful reduction in JP level moderation in slippages and improved operating efficiency. 11:04 11 minutes, 4 seconds The turn this turnound has been driven by tight tighter credit underwriting calibrated dispersements stronger 11:12 11 minutes, 12 seconds performance and sustained focus on portfolio policy. The sequence improvement across key financial parameters including profitability and 11:20 11 minutes, 20 seconds asset quality is a direct outcome of management strategic initiatives and the consistent efforts of team across the bank. 11:29 11 minutes, 29 seconds The improvement in asset quality metrics coupled with better cost control and a healthier business makes reinforce a confidence in the sustainability of this 11:38 11 minutes, 38 seconds recovery. We believe the progress achieved during the quarter marks a structural improvement rather than 11:45 11 minutes, 45 seconds oneoff and position the bank well for continued improvement in profitability and return ratios going forward. 11:52 11 minutes, 52 seconds Isaf 2.0 Startness it transformation remains a key static initiative will go live targeted for Q2 FI27. Beyond 12:01 12 minutes, 1 second improving operational efficiency and scalability, the program is focused on strengthening risk management, regulatory compliance, data governance 12:08 12 minutes, 8 seconds and control frameworks. This transformation will enable better monitoring, improved portability and 12:15 12 minutes, 15 seconds stronger compliance alignment while supporting sustainable growth and improved customer experience. I will now invite our EP CFO Mr. GP to take you through the financial performance. 12:27 12 minutes, 27 seconds Thank you sir and good morning everyone. 12:29 12 minutes, 29 seconds I thank all the participants for taking time for joining us on this call. Let me give you an overview of our financial performance highlights of Q3 FI26. 12:40 12 minutes, 40 seconds As of Q3 FI26, total deposit stood at 24,6 crores, reflecting a moderate 12:46 12 minutes, 46 seconds year-on-year growth of 7%age as compared to 22,415 cr last year with a healthy CD ratio of 83.5%age. 12:57 12 minutes, 57 seconds Our continued focus on building a stable and granular deposit base is clearly reflected in the strong performance of 13:04 13 minutes, 4 seconds retail deposits which increased from 22,426 crores to 20,000 from 20,737 13:12 13 minutes, 12 seconds cr a year back registering a an 80%age of yi growth retail deposits now 13:21 13 minutes, 21 seconds constitute 93%age of total deposits as of Q3 FI26 and the ing the strength, stability and granularity of our deposit 13:30 13 minutes, 30 seconds franchise. KA balances grew to 6,30 crores in Q3 FI26 registering and 8%age 13:37 13 minutes, 37 seconds YI growth with the KA ratio improving to 25.1%age. 13:43 13 minutes, 43 seconds The moderation in deposit pricing in line with soft interest regime has begun to reflect in a lower cost of funds. Our 13:51 13 minutes, 51 seconds our sustained focus on customer acquisition, service quality and branchled expansion continues to support stable and granular ka growth. 14:02 14 minutes, 2 seconds Growth advances increased to 20,679 crores from 18,291 crores a year ago 14:10 14 minutes, 10 seconds reflecting our measured approach to growth which is consistent with on a month-on-month basis from Q2 onwards. 14:18 14 minutes, 18 seconds Quarterly dispersements stood at approximately 13,000 cr growing strongly both year on year and quarter on quarter. 14:28 14 minutes, 28 seconds Sequ lending constituted 81%age of the total dispersements marking the fifth consecutive quarter where secured assets 14:37 14 minutes, 37 seconds formed over 75%age of new lending. This is a direct outcome of our mark strategy 14:44 14 minutes, 44 seconds focused on MSME agree retail and gold which continues to strengthen asset quality and improvement in portfolio 14:50 14 minutes, 50 seconds resilience. The secured portfolio led by mark strategy continued to perform strongly on both YI and Q basis 14:59 14 minutes, 59 seconds reinforcing the success of our strategic shift towards secured lending. The unsequent portfolio declined by 24 15:07 15 minutes, 7 seconds percentage YI and remained stable sequentially reducing the share 37%age 15:13 15 minutes, 13 seconds of the total advances from 55%age last year. With asset quality stabilizing, 15:20 15 minutes, 20 seconds our focus is now firmly on discipline growth, improved recoveries and strengthening portfolio quality, 15:26 15 minutes, 26 seconds ensuring healthy margins. Net interest income improved to 432 crores in Q3 FI26 15:33 15 minutes, 33 seconds from 372 crores in the previous quarter driven by healthy loan growth coupled with lower flipages. 15:41 15 minutes, 41 seconds Quarterly net interest margin improved to 6.6%age from 5.9%age despite a higher share of secured 15:49 15 minutes, 49 seconds lending and further rate cut of 25 basis points in Q3. The benefits of lower cost of funds and improved fund deployment in 15:58 15 minutes, 58 seconds loan book or outweight the marginal yield compression resulting in healthier margins and improved earnings level. 16:08 16 minutes, 8 seconds The bank has a healthy comeback and started delivering a strong improvement in operating performance with pre-provisioning operating profit 253 16:18 16 minutes, 18 seconds crores which is up by 171 percentage sequentially and 98%age on basis. This 16:25 16 minutes, 25 seconds has supported by managing flip wage and NPA sale coupled with robust business growth improving the cost efficiency and securing higher fee based income. 16:36 16 minutes, 36 seconds Non-interest income grew 86%age Qoq and 137%age YI reflecting enhanced operating 16:43 16 minutes, 43 seconds leverage and the benefits through scalability of the business model and ARC sale. The improvement in asset 16:51 16 minutes, 51 seconds quality during Q3 FI26 reflects the strengthening of the portfolio leading to lower slipages apart from the sale of 16:59 16 minutes, 59 seconds NPA growth NPA declined to 5.6%age 6 percentage and NPA to 2.7%age 17:05 17 minutes, 5 seconds while slip pages reduced sharply to 219 crores from 59 cr 505 crores in Q3 FI25. 17:15 17 minutes, 15 seconds This improvement has been supported by stable micro finance performance, disciplined credit underwriting and 17:24 17 minutes, 24 seconds increasing contribution of secured lending under our mark strategy. These developments reinforce the ability and 17:31 17 minutes, 31 seconds strength of our risk management framework and the sustainability of our asset quality improvement. Our focus 17:38 17 minutes, 38 seconds going forward is to further strengthen asset quality by reducing both GNPA and NNPA to improved levels. 17:46 17 minutes, 46 seconds This will be achieved through disciplined credit delivery, improved monitoring and a cautious approach to micro finance lending, accelerated 17:54 17 minutes, 54 seconds recoveries and continued growth in required assets under mark framework. 17:59 17 minutes, 59 seconds Together these actions will enhance balance sheet strength and will drive towards sustainable profitability. Q3 18:07 18 minutes, 7 seconds FI26 represents an important inflection point for our bank with a return to profitability and a pack of 18:16 18 minutes, 16 seconds seven cr with improving operating metrics and normalization of credit course. We expect to deliver that trend in the coming quarters ahead. 18:26 18 minutes, 26 seconds FI26 remains a year of consolidations for the bank with emphasis on improving asset quality, strengthening operating metrics and pursuing discipline growth. 18:37 18 minutes, 37 seconds Our continued focus on productivity enhancement, cost optimization and balance sheet strengthening is yielding 18:44 18 minutes, 44 seconds positive outcomes with the operating environment stabilizing and our strategic initiatives gaining re 18:50 18 minutes, 50 seconds traction. SFSB is well positioned to drive the next phase of sustainable affiliate growth. Thank you very much. 19:13 19 minutes, 13 seconds The floor is open for question and answers. 19:18 19 minutes, 18 seconds Thank you very much ladies and gentlemen. We will now begin the question and answer session. Anyone who wishes to ask a question may press star 19:27 19 minutes, 27 seconds and one on the touchstone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. 19:39 19 minutes, 39 seconds Ladies and gentlemen, we will wait for a moment while the question queue assembles. 20:32 20 minutes, 32 seconds The first question is from the line of Deepak Podarad from Safaya Capital. Please go ahead. Yeah, I'm audible sir. 20:40 20 minutes, 40 seconds Yes sir, you're audible. 20:42 20 minutes, 42 seconds Yeah, thank you very much for this opportunity sir. So just a few things I wanted to understand now. Uh now with your gross NPA reducing and even uh 20:51 20 minutes, 51 seconds slippages uh have come down considerably. So, so by when we should uh see normalization of credit cost or a 20:59 20 minutes, 59 seconds declining trend as such uh credit cost will nor will get normalized in the next financial year itself. 21:09 21 minutes, 9 seconds Okay. I mean I mean it's will it be visible from first quarter fourth quarter? 21:16 21 minutes, 16 seconds Yeah, it will be from next uh I mean it is already moderated on a quarter on quarter basis or on a month-on-month 21:22 21 minutes, 22 seconds basis. it has already got moderated and by next year Q1 itself you know it will be at a comfortable stage. 21:32 21 minutes, 32 seconds Okay. So from first QFI 27 a visible improvement may be uh may be seen right. I mean in terms of your credit cost. 21:40 21 minutes, 40 seconds Yes. 21:41 21 minutes, 41 seconds And what's the uh normalized credit cost now given your u your already 63% is your secured book right? So, so what 21:49 21 minutes, 49 seconds what would be a normalized credit cost given the current portfolio mix? 21:55 21 minutes, 55 seconds Uh it will be somewhere around uh 2 to three 2 to 3%. Yeah. 22:04 22 minutes, 4 seconds Okay. Okay. Okay. Understood. And and and and and how do we see the ROA profile now given a I mean a change in 22:11 22 minutes, 11 seconds our mix of portfolio. So so I don't consider the ROA that you used to do I mean at a higher MFI book. 22:18 22 minutes, 18 seconds share can be repeatable with the current portfolio mix. So, so what is your steady state ROA profile that you expect 22:26 22 minutes, 26 seconds given the current profile uh portfolio mix? Yeah, getting the ROA stabilized it will take some more time because you 22:34 22 minutes, 34 seconds know there is some backlog to be absorbed in the PL and on a normalized level we hope that the ROA will be 22:43 22 minutes, 43 seconds somewhere around 1.5 to 2% going forward on a steady state. 22:49 22 minutes, 49 seconds Okay. and and this we can expect in FI27 itself or it will take more time uh the normalization you may not have the full 22:56 22 minutes, 56 seconds impact FI28 you will have the full impact as things stands by FI28 okay 23:04 23 minutes, 4 seconds understood and and any sort of outlook you want to share for FI27 in terms of growth and all how how should one look at the loan book growth 23:12 23 minutes, 12 seconds 27 we expect that the loan growth will be somewhere around 25%age around Uh-huh. 23:20 23 minutes, 20 seconds And this year where we we look to end FI26 uh this year will be you know maybe 23:27 23 minutes, 27 seconds around 15 as of now we are on 14% so based upon some increment will happen. 23:34 23 minutes, 34 seconds Okay. So yeah 15 16% would be a fair assumption. Yeah. 23:40 23 minutes, 40 seconds Okay. Okay. And just one last thing given the current improving situation quarter and quarter we would see improvement in terms of your performance 23:47 23 minutes, 47 seconds whatever uh we have done um in let's say in third quarter quarter and quarter we should expect some improvement. 23:55 23 minutes, 55 seconds Yes definitely you can expect quarteron quarter uh improvement and all all parameters. 24:02 24 minutes, 2 seconds Mhm. Fair point. Okay. Okay. That would be it from my side. Wish you all the way best. Thank you so much. Thank you. Thank you. 24:10 24 minutes, 10 seconds Thank you. Participants who wish to ask a question may press star and one on the touchstone telephone. The next question 24:18 24 minutes, 18 seconds is on the line of Chinmai Nema from Prasad Capital. Please go ahead. Uh good morning sir. Obam audible. 24:26 24 minutes, 26 seconds Yes sir audible. Uh sir could you please uh share the write off numbers on the micro finance book for uh 9 months uh 24:35 24 minutes, 35 seconds Syri only had some AR50. 24:47 24 minutes, 47 seconds So could you share the number for that? 24:49 24 minutes, 49 seconds What would be the total number in the 9 months? 24:58 24 minutes, 58 seconds in months it is 1,000 crores,8 crores. 25:04 25 minutes, 4 seconds Got it. And uh secondly, could you share the net NPA number on the micro finance book? So uh we do report the gross NPA 25:13 25 minutes, 13 seconds number but if you could also share the net NPA number on the micro finance book. Uh the number we will share. 25:24 25 minutes, 24 seconds Uh okay sir. Thank you. 25:31 25 minutes, 31 seconds Thank you. Thank you. J may thank you. Participants who wish to ask a question may press star and one on the touchstone telephone. 26:02 26 minutes, 2 seconds Participants who wish to ask a question may press star and one on their touchstone for 26:34 26 minutes, 34 seconds participants who wish to ask a question may press R and one on the touchstone telephone. 27:41 27 minutes, 41 seconds Participants who wish to ask a question may press star and one on the touchstone telephone. 28:04 28 minutes, 4 seconds Ladies and gentlemen, that was the last question. I would now like to hand the conference over to the management for the closing comments. 28:20 28 minutes, 20 seconds Okay. Thank you. Thank you very much. So as we we have been communicating throughout the year and as mentioned earlier also FI26 will be a year of consolidation for the uh organization. 28:32 28 minutes, 32 seconds We believe we have taken the right strategic steps and hopefully supported by positive micro finance environment. 28:41 28 minutes, 41 seconds We can expect to see continued growth. I would like to again thank all the participants, investors and analysts for 28:48 28 minutes, 48 seconds taking the time out for this conference call today. In case you have any follow-up questions on or inquiries, you 28:55 28 minutes, 55 seconds can always reach out reach out to our investor relations team. Thank you very much. 29:02 29 minutes, 2 seconds Thank you. On behalf of ASAP Small Finance Bank Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.