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Rural/Semi-urban and local economy-based Business model protecting asset quality
AU Small Finance Bank (AU) hosted a business update call to share insights on: a) impact of COVID-19 on portfolio quality, and b) impact of recent developments on deposit accretion. Key takeaways: a) since COVID-19 impact is limited to metro and tier-1 cities as of now and given that AU’s business model is largely focused on rural/semi-urban and local economics, the management expects asset portfolio quality to remain robust in Q4FY20E; b) AU’s exposure to Rajasthan tourism is less than 15% of its total Rajasthan exposure and Q1 is normally a lean season; c) AU’s exposure to M&HCV segment is only 1.5%; d) AU’s exposure to wholesale deposits (>Rs500mn from HNIs, government, corporates, etc.) is less than 20% of total deposits, so it has witnessed minimal withdrawals in bulk deposits. Overall, the management highlighted that since COVID-19 impact on business aggravated only in the last 10-15 days, currently it is business as usual for them. However, the company will be closely watching the situation over next 15 days. Management is of the opinion that it is too early to comment on COVID-19 impact on FY21E outlook. Upgrade to BUY.
* Rural/Semi-urban and local economy-based business model would help it to sustain asset quality. Over the years, AU has built its franchise around rural/semiurban markets and targeted customers whose cashflow is dependent on the local economy. Further, while expanding its balance sheet, the company always remained focused on building a granular secured portfolio. Vehicle (disbursed average ticket size: Rs0.3mn) and SME (Rs1mn) segments contributes ~76% of total AuM with average EMI around Rs15,000. In the current scenario, when COVID-19 impact is more aggravated in metro’s and tier-1 cities, AU sounds confident of sustaining best-in-class asset quality in Q4FY20E. However, the management did highlight that customers whose cashflow is linked to tourism/taxi and who operate in metro’s, might delay or default on one or two EMIs. But AU’s experience suggests that once things normalise, customers clear all EMIs and real economic loss is minimal – even more so because the loans are highly collateralised. AU’s exposure to taxi operators is ~20% of the vehicle finance book and spread across 11 states
* Exposure to bulk deposit is less than 20%; retail deposit traction unaffected thus far. AU’s exposure to wholesale deposits (deposits with >Rs500mn) is ~20% of its total deposit base. So far, it has witnessed minimal withdrawals in HNI and government categories and is closely tracking outflow on daily basis. Retail deposit mobilisation remains on track and ground feedback as of now is encouraging. In a worst case scenario, if deposit mobilisation gets impacted in coming days, AU’s ability to source funds via refinancing/securitisation at competitive rates due to its retail focus, would ensure margin stability as well as growth momentum. However, in the current environment, preference would be towards quality than growth.
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