01-01-1970 12:00 AM | Source: ICICI Securities Ltd
Hold AU Small Finance Bank Ltd For Target Rs.625 - ICICI Securities
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Reorganises itself into 10 SBUs to ensure sustainability and scalability; insights into two SBUs

AU Small Finance Bank (AU SFB) has always remained ahead in pre-empting future business trends and building capabilities to serve the evolving needs of customers. We derive this view from AU’s past initiatives such as: i) Reducing exposure in MHCV segment during FY13-FY14; ii) strategic shift towards used vehicle financing in FY19-FY20, considering slowdown in new vehicle sales; iii) during 9MFY22, it calibrated growth in wheels segment as reflected in higher sourcing of customers with >700 CIBIL score at 56% vs 45% on AUM basis, and iv) focus on building a digital platform during FY20-FY21, given the current wave of digitisation. Recognising the massive structural growth opportunity across segments, AU has reorganised itself into 10 strategic business units (SBUs) to ensure sustainability and scalability. With this backdrop, AU hosted a third event to discuss key strategic priorities for two SBUs: i) Branch banking and ii) treasury, DCM and wholesale liability. Maintain HOLD with an unchanged target price of Rs625, valuing the stock at 3.2x FY24E BVPS

* Branch banking to drive granular, retail deposits – a key ingredient to build long-term sustainable business model. While AU’s asset franchise has been resilient with best-in-class asset quality performance across cycles, evolution of its deposit franchise since SFB conversion is equally encouraging. It delivered 56% CAGR (March’18-Sep’22) in deposits vs 46% for SFBs and 9% for systemic deposits. In a span of <6 years staring banking operation, its retail deposits base increased to 73% as on Sep’22 vs 39% in March’19. Similarly, CASA ratio expanded to 42% vs 18% in March’19. Since the commencement of SFB operations, funding mix steadily tilted towards deposits as reflected in the share of borrowing in total funding mix declining to 10% by Sep’22 from 49% in 2018. As on Sep’22, branch banking contributes 71.4% of total deposits, treasury & wholesale 27.3% and video banking 1.3%.

* Strategically focuses on urban markets (key deposit centres) to accelerate retail deposit mobilisation. AU commenced its deposit-led liability journey in FY17, initially it focused on core markets (semi-urban and rural markets) where AU brand was already visible due to its strong asset franchise. Post witnessing an increasing acceptance of AU brand (deposit mobilisation) in core markets, it strategically shifted focus towards urban markets – top 136 cities (each centre is >Rs100bn deposit market) account for 65% of total systemic deposits. In order to compete with the already-established brands and to have targeted approach, it segregated retail and wholesale liability business by setting up branch banking division as a separate unit in FY19. Since then, it accelerated its distribution network in urban market as reflected in ~87% of incremental liability branches (exURC) opened in urban markets.

* Comprehensive product portfolio with customer-centric approach would be the key enabler in building stable low-cost deposit base. A key enabler for AU’s successful execution of liability strategy is its differentiated approach towards attracting deposit customer with customer-centric approach. Extended banking hours, paperless banking with no slips for RTGS, deposits, “No home branch” concept, monthly interest payout etc. are some of the industry-first initiatives to simplify banking. The same helped AU deliver 56% deposit CAGR between March’18-Sep’22 and command 0.30% market share in systemic deposits.

o AU commands leadership position in core markets…AU’s 25-year long asset financing business has helped it create a strong brand recall in semiurban and rural (core markets for AU) markets. The same enabled it to mobilise deposits from core market at an accelerated pace. AU’s increasing acceptability in core markets reflects in it commanding >10% market share in 23 core market branches and 18 branches with >Rs1bn deposit base.

o …now focuses on urban markets. AU’s total liability branches increased to 737 by Sep’22 from 377 in March’18, of which urban-focused branches stands at 215 as on Sep’22 vs 98 in March’20 and 80 in March’18. Within urban market, AU is focusing on increasing its penetration in metro market and incrementally it is opening more branches in metro markets. As a result, share of metro branches (within urban branches) increased to 33% in Sep’22 from 22% in March’20.

o Robust digital landscape to help expand catchment area. While physical branches improve brand visibility, digital landscape expands the catchment area. For example, physical branch could generally cater to customers within 1-2km radius while digital platform enables customer acquisition within 4-5km. Video banking accounts for 1.3% of total deposits as on Sep’22.

* Focus on ‘value acquisition’ than ‘volume acquisition’. AU in its short deposit journey has realised that mere deposit account opening of mass would limit its cross-sell and up-sell journey. Hence, it shifted focus towards value acquisition and launched a series of products like Royale SA (targeted towards HNI), Platinum SA (mass affluent) and high-value current accounts etc. Simultaneously, it also redesigned compensation and scorecard for sales personal to accelerate value acquisitions. This resulted in 10% of sales staff opening >10 RPC accounts by Sep’22 vs only 2% in June’21, >23% of sales is opening 7-10 accounts in Sep’22 vs 7% in June’21. Further, Royale and Platinum account for 31% of total SA customer acquisition in H1FY23.

* Higher average ticket size reflects increasing acceptability of AU as a primary banker. Steady increase in saving account balance reflects increasing acceptability of AU deposit account as a primary transacting account – saving account balance in Royale account stands at >Rs1mn vs requirement of only Rs0.1mn, average balance in Platinum stands at Rs0.2mn vs requirement of Rs25,000. Average saving balance even in normal saving account stands much higher at Rs89,000, reflecting higher customer acquisition in urban and metro markets. Average monthly transaction for transacting customer stands at 28.6 in Sep’22 vs 16.6 in June’21. Product per customer also increased to 1.63 in Sep’22 from 1.48 in June’21.

* Treasury, DCM and wholesale liability vertical accounts for ~35% of deposits + borrowing and 28% of investment + advances as on Sep’22. While AU is incrementally focusing on building retail liability base, it separated wholesale liability vertical to manage liquidity and interest rate cycle more effectively. Total wholesale deposit book stands at ~Rs160bn of which government business accounts for 44%, FIG & Co-operative Bank is 34%, NBFC is 11%, wholesale deposits is 7% and CD is 4%. AU strategically prices wholesale deposits lower than retail deposits. Within wholesale liability, AU focuses on CASA deposits as reflected in CASA ratio in government business increasing to 57% in FY22 from 26% in FY19. Effective interest rate management reflects in cost of funds declining by 380bps since bank inception and as on Sep’22 stands at 5.8% vs 8.4% in FY18.

Key risks. Upside: Higher-than-anticipated growth in near term. Downside: Further attrition at top level.

 

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