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Showcasing liability strength – cuts SA rate

AU Small Finance Bank showcasing its improved liability franchise, reduced saving deposits rate by ~100bps in select buckets (refer Table 1), while it kept entry-level SA rate unchanged at 3.5%, amid concerns around asset quality due to resurgence of covid cases given its higher exposure to vulnerable segments like SME & Vehicle. The proposed SA rate cut would help AU further improve its cost of funds and retail deposit share. In FY21, overall cost of funds fell by 86bps to 6.83% from 7.69% in FY20.

Incremental cost of fund in FY21 remained at a much lower level of 5.9%, likely to come down further with proposed rate cut. Its liability franchise continued to improve in FY21 despite covid-led challenges as reflected in A) increasing share of retail deposits, B) improved CASA ratio from 14% to 23% in FY21, C) increasing share of deposits in total funding (deposits + borrowings) to 84% from 72% in FY20. Maintain Add.

* SA rate cut by ~100bps in select buckets.

Deriving comfort from increasing acceptance of ‘AU brand’ deposits grew robust 38% YoY in FY21 and 1st time since the commencement of SFB operations CD ratio fell below 100%, it cut SA rate by ~100bps for balances between Rs1mn-2.5mn and Rs20mn-50mn. SA rate remained unchanged for balances up to Rs0.5mn.

* Focus on deepening customer relationship.

It had incrementally focused on quality vs quantity acquisition and deepening engagement/relationship with deposit customers during FY21. Active engagement with e-commerce players, improved payment & digital infrastructure and added branches in urban markets strengthened its liability muscle in FY21 as reflected in – A) 41% YoY increase in transaction ticket size in FY21, B) 28% YoY growth in debit card spending, C) 7.5% YoY growth in customer activation in PoS/e-com, D) 2.3x jump in AMB (non-zero balance accounts and E) 2x jump in average transactions/transacting customers in FY21.

* Widening & deepening its presence in urban markets.

During FY21, it added 37 new branches mainly in cities like Agra, Bhubaneshwar, Bengaluru, Hyderabad, Jammu, Kanpur, Kolkata, Lucknow etc. As of March’21, share of deposits from urban market stands at 74% vs 75% in FY20. Increasing presence in urban market backed by robust digital platform & payment ecosystem is likely to help further strengthen its liability franchise going ahead.

* Improving liability franchise will further strengthen its market positioning.

AU’s ability to think beyond traditional banking and building customer-friendly processes have helped it build strong retail liability franchise vs other SFBs. On the back of its improving liability franchise, its cost of fund continued to trend downwards, declining to 6.5% in Q4FY21 vs 7.5% in Q4FY20. Further, cost of incremental fund raised in Q4FY21 is significantly lower by ~60bps at 5.9%.

* Key risks:

a) Stress unfolding higher than anticipated and b) delay in growth revival.

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