CRISIL updates on ratings of AU Small Finance Bank Limited

CRISIL has assigned its 'FAA+/Stable' rating to Rs 40,000 crore fixed deposit programme of AU Small Finance Bank Limited (AU SFB), and has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the debt instruments.

Also, CRISIL has withdrawn its rating on the bank's tier II bonds of Rs 500 crore, in line with CRISIL's withdrawal policy. CRISIL has received client confirmation that this instrument has not been placed and the same has been revalidated from publicly available data.

The ratings reflect AU SFB's adequate capitalisation, gradual ramp-up in deposit franchise, healthy reported asset quality and adequate profitability. These strengths are partially offset by moderate, though improving, scale of operations, geographic concentration in revenue, and sizeable, though reducing, wholesale deposits with a relatively low share of current account savings account (CASA) in overall liabilities.

AU SFB has gradually ramped up its deposit franchise over the years to a deposit base of Rs 26,980 crore as on September 30, 2020, registering a growth of 22% over the past fiscal and accounting for 73% of external borrowings (excluding securitisation and assignments). Commensurate to this growth, the share of retail term deposits plus CASA (less than Rs 2 crore) increased from 40.0% as on September 30, 2019, to 50.2% a year later.

As on September 30, 2020, the bank's fixed deposits (FDs; including compound interest) stood at Rs 20,008 crore, registering a growth of 15.8% over the preceding 12 months, and accounting for 53.9% of the total external liabilities. The depositor profile for FDs remains diversified with almost 40% of it being sourced from individuals, sole proprietors, partnership firms, among others. In terms of maturity profile of outstanding FDs, the share of deposits having a tenure of more than nine months increased from 76% in March 2019 to 84% as of October 2020. Moreover, the share of FDs outstanding with ticket size less than Rs 2 crore increased from 31.6% to 48.0%, making the deposit profile granular.

In the second quarter of fiscal 2021, the monthly renewal rate in FDs declined from its average rate This was driven by the bank's call to increase focus on its retail deposit franchise and forgo a few wholesale accounts, with the dual objective of reducing cost of funds and to attain higher granularity. The consequent reduction of 5% points in the share of term deposits in the total deposit base was offset by an equal rise in the share of CASA.. Within term deposits, the share of retail term deposits (of less than Rs 2 crore) increased from 40.0% as on March 31, 2020, to 48.4% as on September 30, 2020. Nonetheless, renewal rate in FDs revived in October 2020.

Capitalisation was adequate compared with the bank's scale of operations, reflected in absolute networth of Rs 4,916 crore and tier I capital adequacy ratio (CAR) of 18.3% as on September 30, 2020. The ratings also factor in AU SFB's stable asset quality, indicated by reported Non Performing Assets (NPAs) remaining consistently below 2.5% over many quarters. On September 30, 2020, the bank reported GNPA and NNPA of 1.5% and 0.5%, respectively.

For fiscal 2020, the bank registered annual growth of 27% in assets under management (AUM), driven by its vintage products in the retail segment such as Wheels and small business loans (SBLs). The AUM base of Rs 30,893 crore as on March 31, 2020, though improving ' is moderate compared with peers. For the first half of fiscal 2021, AUM declined by 1% (un-annualised) to Rs 30,590 crore because of downturn in monthly disbursements in the aftermath of the outbreak and lockdown. Moreover, 42% of the bank's loan portfolio is concentrated within Rajasthan, and the top four states (Rajasthan, Gujarat, Madhya Pradesh and Maharashtra) accounted for 81% of the bank's AUM as on September 30, 2020'indicating a high degree of geographic concentration.

On the liabilities side, AU SFB's reliance on bulk term deposits reduced over the first half of 2021 from 56.7% to 46%, but remains higher than peers with higher vintage. However, 63% of these bulk deposits were reported to be non-callable and hence cannot be called prematurely without regulatory approval. The share of CASA in the overall deposit base (including Certificates of Deposits - CDs), after moderating to 15% over the past 4-6 quarters, increased to 19.8% as on September 30, 2020, which is similar to most other small finance banks (SFBs). The bank's earnings remained adequate over its banking journey ' despite marginal compression in net interest margin due to statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements after converting into a SFB.

Following the downturn in the immediate aftermath of the pandemic, business activity started to revive towards the end of the first quarter of fiscal 2021 and with the onset of the second quarter, traction increased. For AU SFB, the reported collection efficiency for the first quarter of fiscal 2021 was 68% which improved to 96% in the second quarter and, has remained stable thereafter. The improvement in collection efficiency is a result of rise in the proportion of customers making full equated monthly instalments (EMI) payments - from 67% to 78% in the second quarter of fiscal 2021, compared with 80% during the normal course of business in preCovid era.

While the trajectory in collections and ultimate credit loss incurred are key monitorables, AU SFB continues to derive benefits from its transition to a bank from a non-banking financial company (NBFC) - in terms of improved market perception, systemic liquidity support and lower cost of funds, driven by its ability to raise public deposits.

AU SFB's liquidity coverage ratio (LCR) was healthy at 139% as on September 30, 2020, along with an adequate balance of excess SLR and other forms of liquidity.

On the deposits front, the retention rate in deposits remained largely stable over the past 6-8 months, barring a few instances of momentary volatility. However, as per the bank's management, the inflow of incremental deposits was impacted momentarily in the aftermath of the lockdown though it was restored soon after. In addition to excess SLR, the bank tied-up refinance limits and received sanctions in the first half of fiscal 2021 to manage the risk of deposit outflows, if any.

Shares of AU Small Finance Bank Ltd was last trading in BSE at Rs.881.2 as compared to the previous close of Rs. 886. The total number of shares traded during the day was 11530 in over 865 trades.

The stock hit an intraday high of Rs. 898.7 and intraday low of 871.85. The net turnover during the day was Rs. 10190828.

Source : Equity Bulls

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