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Robust growth potential in SBL and Commercial Banking

Prudent underwriting to enable strong asset quality

We attended the fourth session of AUBANK’s virtual Insights Day. The management dwelled upon its two SBUs: Secured Business loans and Commercial Banking. As these businesses provide significant growth opportunities, the management aims to grow this book at a healthy pace. It intends to offer superior digital capabilities and cross-sell its wide bouquet of services, which will enhance its fee income. Here are the key takeaways from that session:

Secured Business loans (SBL) – Mr. Amar Bahl, Head SBL

* It has made a segment-wide and profile-wise questionnaire to assess cash flow and the income profile of borrowers for the purpose of underwriting. It has put in place a robust mechanism and has an in-house team to assess the property and the collateral offered.

* The bank has created a sustainable model for a deep understanding of the business and to assess each factor in greater detail.

* MSMEs constitute 30% to India’s GDP, 50% of its exports, and employs ~110m.

* Around 75% of AUBANK’s exposure is to borrowers (average exposure of up to INR2.5m) with lower capex and OPEX requirements. Rajasthan and Madhya Pradesh are home to ~2.6m MSMEs, which offers it significant growth opportunities. Over 30% of the book is outside Rajasthan and Madhya Pradesh. It has increased the number of branches under SBL lending to 450.

* It offers collateral-backed loans of INR0.2m-10m with a tenure up to 15 years.

* Snapshot: Average tenure stands at 101 months, with an ATS of ~INR1m and a LTV of ~46%. Around 75% of its customers are NTB, with a GNPA of 2.69%. About 70% of its customers make payments without any follow up. Even customers that availed of the moratorium have started to make payments.

* About 63% of its book sports a RoI of 14-18% and a ticket size of sub-INR1.5m. The bank is witnessing good opportunities in the Mid segment as well.

* Sourcing mix: Direct sourcing (73%), AU Connect – local city referral (21%), cross-sell (3.5%), digital (1.5%), and BC (1%). Sourcing via alternate channels are gaining scale and growing at a faster pace.

* Credit score mix: New to credit (16%), 700 and above (68%), 650-699 (12%), 600-649 (3%), and less than 600 (1%).

* To assess the collateral, the bank follows a dual legal check and an in-house technical team. Around 85% of collateral are self-occupied properties, with 75% being residential and 98% fully constructed.

* The underwriting process has been made more stringent, with a reduction in portfolio concentration to COVID-impacted sectors.

* Portfolio concentration in the Education/Hospitality/Daily and Allied sector has fallen to 1.5%/1.3%/0.7% from 6.3%/2.2%/1.8% earlier.

* As most of the impacted sectors have either recovered or are in the last phase of a recovery, the management believes it is well placed to capture this growth opportunity and is likely to grow at a healthy pace.

* As SBL is a low OPEX and a high margin business, it aids overall profitability of the bank.

Commercial Banking – Mr. Vivek Tripathi, Head Commercial Banking

* Commercial Banking includes Business Banking, Agri Banking, NBFC lending, Real Estate lending, and Transaction Banking services. Business and Agri Banking constitute 70% of the total business.

* Business mix: ~55% is working capital and 45% is term loans.

* Commercial Banking customers have a deposit balance of INR52.7b.

* The business has a C/I ratio of 35%. The recurring fee income profile stands at 28% of NIM, with a RoA of over 2.5% and very low credit cost. Around 98% of its book sports a GNPA of 0.48%.

* A large part of the book (barring Real Estate) is at a floating rate, which is linked to the repo rate and is reset on a quarterly basis.

* AUBANK’s market share in Commercial Banking stands at 0.2%, with the share of Private Banks constantly rising, providing a significant growth opportunity.

* Business Banking: ATS stands at INR8.5m, with working capital constituting 70% of total loans. WIRR stands at 10.15%, with GNPA at 0.17%.

* Sourcing mix: Branch (32%), self-sourced via referrals (29%), and channel partner (39%). Urban areas account for 58% of the book, while 42% is from its core region, with 80% being PSL compliant. Around 63% of the book has a ticket size of less than INR50m.

* Agri Banking: ATS stands at INR9.8m, with working capital constituting 60% of total loans. WIRR stands at 10.11%, with GNPA at 0.74%.

* Sourcing mix: Branch (19%), self-sourced via referrals (34%), and AU Value (47%). Urban areas account for 54% of the book, while 46% is from its core regions, with 93% being PSL compliant. Around 64% of the book has a ticket size of less than INR50m.

* NBFC lending: It has an exposure to 146 NBFCs, with 90% of the book sporting an investment grade. ATS stands at INR130m, with secured lending constituting 78%. Average residual tenure stands at 21 months. This floating rate book is linked to the repo rate, with an IRR of 10.8% (up 110bp since Mar’22). GNPA stands at a mere 0.01%.

* REG book: The focus remains on growing the cash flow backed business in Tier I cities, while reducing the mix in the LAP business. AUBANK is focusing on loans with an ATS of less than INR150m and Affordable Housing projects.

* Affordable Housing constitutes 42% of the book. RERA projects constitute 92% of the portfolio, with an average loan cycle of 30 months. ATS stands at INR142m, with average Retail ticket size of INR9m.

* GNPA ratio stands at 1.85%, with 97% of the book being current. Only three customers are 90+dpd. No customer loans disseminated after Apr’17 have turned into an NPA. GNPA is 100% provided for and the book has a security/receivable cover of 1-5-2x/2-2.5x.

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