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Sequential improvement across the board; sustainability is key

Fino Payment Bank’s (Fino) Q2FY23 financial performance showed improvement across business parameters as reflected in 36% QoQ growth in earnings at Rs138mn –driven largely by 60bps QoQ gross profit margin expansion and benefits of operative leverage. Gross revenues grew 5% QoQ while total operating expenses rose only 2% QoQ. As a result, cost/income ratio moderated to 95% vs 97% in Q1FY23. Strong revenue growth and operating leverage benefits led to 100bps QoQ PAT margin expansion to 4.5% during Q2FY23 vs 3.5% in Q1FY23. Margin expansion was primarily driven by strong 66% QoQ growth in CASA revenues (margin @ 58%), 16% QoQ growth in CMS revenues (margin @ 40%) and higher share of revenues from own banking channel at 64% during Q2FY23 vs 62% in Q1FY23. Total throughput remained flat QoQ at Rs605bn due to sequential decline in MATM volumes (down 18% QoQ), AEPS (4% QoQ) and remittances (2% QoQ). Strong 14% QoQ growth in CMS volumes restricted further decline in overall throughput during Q2FY23.

Management unveiled Fino 2.0 digital initiative during Q1FY23 aiming at converting ‘offus’ customers to ‘on-us’ and then cross-sell other financial services and products. Earlier investments towards digital platforms have already started yielding positive results as reflected in digital throughput now contributing 17% to total throughput as of Sep’22. Maintain BUY with a TP of Rs325, valuing at 32x P/E FY24E EPS.

* Higher share from own banking channel and steady scale-up in high-margin focused products like CASA and CMS drove 36% QoQ growth in earnings. Net earnings, after falling >40% QoQ in Q1FY23, grew 36% QoQ to Rs138mn. While Q2FY23 earnings growth looks impressive, PAT in absolute terms is still lower than the Q4FY22 PAT of Rs176mn. During Q2FY23, earnings were driven mainly by 60bps QoQ gross margin expansion and tight control on operating expenses (up only 2% QoQ). Gross margin expansion was driven largely by increasing share of business via own banking channels and increasing share of CASA renewal income (>55% margins)

* Management is cognisant of volatile margin trend; plans to improve the share of own channel business to 67% from currently 62%. Sharp recovery in domestic remittances (85% of volumes via open banking as of Sep’22) post covid led to share of open banking revenues increasing to 38% as of Jun’22. Given that open banking margins are very low at 4% vs 47% in own banking channel, management highlighted that they are cognisant of the margin contraction and have initiated measures to arrest the same. Q2FY23 started reflecting trend reversal as reflected in share of open banking revenues declining to 36% vs 38% in Q1FY23. Within existing products, Fino will continue to focus on scaling CASA and CMS revenues going forward given that renewal margin in CASA is as high as >60%.

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