Detailed Narrative
Robust Growth in Deposits and Loan Book
AU Small Finance Bank demonstrated robust growth in FY25, with its deposit book expanding by 27% year-on-year to INR124,000 crores. The underlying deposit growth, excluding Fincare deposits, was over 30%. Concurrently, the loan book grew by 20% year-on-year, reaching INR115,000 crores, significantly outpacing the banking system's credit growth of 10.8%. This growth was primarily driven by secured segments, with retail secured assets growing by 21% and commercial banking by 32%.
Improved Profitability and Operating Efficiency
Despite challenging macroeconomic conditions and higher credit costs, the bank achieved a Return on Assets (ROA) of 1.5% for FY25, with a Profit After Tax of INR2,106 crores. EPS grew by 19% and book value per share by 23%. A key highlight was the significant improvement in operating efficiency, with the cost-to-income ratio reducing from 64% in FY24 to 57% in FY25, driven by tight control on overheads, marketing costs, and synergies from the Fincare merger.
Unsecured Book Recalibration and Credit Costs
The unsecured book, including Microfinance (MFI) and credit cards, underwent a period of recalibration in FY25, resulting in an 18% degrowth for the year. MFI declined by 17% and the credit card book by 19%. The bank incurred significantly higher credit costs in these segments, making an accelerated provision of INR150 crores in Q4 FY25 to strengthen provision coverage, bringing overall credit cost to 1.3% for FY25. Management expects credit costs for MFI to be 3-3.5% and credit cards 6-7% in FY26.
NIM Pressure and Deposit Strategy
The Net Interest Margin (NIM) for Q4 FY25 stood at 5.79%, a slight decrease from Q3's 5.85%. Management anticipates continued pressure on NIM in the near term due to the interest rate cycle, despite having cut term deposit rates by 25 bps and rationalized savings account rates. The bank aims to build its CASA franchise based on product, brand, and services rather than aggressive pricing, with the CASA ratio currently below 30%.
Strategic Initiatives and Future Outlook
The bank is committed to building a retail-focused institution serving self-employed and MSME customers. It plans to open 70-80 new branches in FY26, primarily in top cities, and leverage Fincare touchpoints for expansion in South India. The application for a universal banking license is under RBI review, with a decision expected in the current calendar year. The bank aims for a medium-to-long-term ROA of around 1.8% and business growth of 2x-2.5x nominal GDP.
CGFMU Scheme and MFI Book
The Credit Guarantee Fund for Micro Units (CGFMU) scheme is a critical backstop for eligible MFI loans. By the end of FY25, approximately 36% of the MFI portfolio was covered under the guarantee. The bank aims to increase this coverage to over 75-80% for the overall MFI book, which is expected to reduce credit cost volatility and allow for cautious scaling of the MFI business.
Credit Card Business Turnaround Plan
The credit card business is undergoing a recalibration phase, with issuance volumes reduced from 40,000-45,000 to 10,000 per month. Management expects the business to break even by FY27 and generate an ROA of 4-5% thereafter. New sourcing is anticipated to pick up to around 20,000 cards per month post September, following a complete repair and rebuilding of the portfolio with tighter underwriting and a focus on existing bank customers.