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Fino Payments Bank: Growth momentum robust; operating leverage to aid earnings

Product mix to shift in favor of higher margin products

We hosted an investor interaction with Mr. Ketan Merchant, CFO, Fino Payments Bank. It began operations in CY06 and received its Payments Bank license in CY17. It started operations with Remittance and BC banking and subsequently ventured into Micro ATM and Aadhaar Enabled Payments System (AEPS), CASA, and the CMS business. He spoke on the bank’s progress in scaling up its key product lines, and its outlook on growth and profitability. Here are the key takeaways:

Product mix to shift in favor of high margin products

The bank has maintained a healthy product mix, with Remittances/Micro ATMs and AEPS/BC banking/CASAand CMS at 34%/34%/21%/10-11% as of FY21. The management expects the growth momentum to remain healthy across segments, with the mix of high margin products,such as CASA and CMS, likely to increase to ~34% in the medium termfrom 17% at present (10-11% in FY21).

Growth outlook remains healthy; throughput to grow at 30-35%

Total throughput has grown at a healthy pace of 42% YoY to INR1.34t in 9MFY22. Monthly remittance throughput too crossed pre-COVID levels in Dec’21. Fino has ~5m customers, while the total customer universe stands at 700-800m, implying significant growth opportunities. It has received a license to offer International remittances, and the same is likely to be launched soon. The management’sstrategy is to own the customer and then cross-sell other products. The latteris likely to start from 3QFY23 and will drive the next leg of growth, while the legacy Micro ATM and AEPS business will clock 20% CAGR over the next few years. Growth is likely to remain healthy, with an overall 30-35% growth in throughput rate guidance over the medium term.

CASA and CMS to drive future growth

The new product lines of CASA and CMS services are witnessing robust growth, with the management aiming to double revenue over the next 12-14 months. Fino opens CASA accounts on a subscription model, with revenue earned on an annuity basis. It opened ~3.9m accounts as of 9MFY22 (200k accounts opened in Dec’21), with an average balance per customer of ~INR900 (up ~INR2k for CA accounts). Gross margin for CASA products stood at 55% in the first year and 70% from the second year onwards, while the same for CMS stood at 45% (take rate of 0.24%). Going forward, revenue growth is likely to be driven by higher margin CASA and CMS products, which will aid profitability. The CASA and CMS mix constitute 17% at present v/s 10-11% in FY21. It is likely to rise to 33-36% in the medium term.

Merchant acquisition remains strong, network to grow by 3x over the next two-to-three years

The bank’smerchant count grew a robust 58% YoY to 0.87m in 9MFY22. These merchants act as banking outlets and are not just facilitators of payments/e-commerce transactions. This adds to the income profile of merchants, with whom Fino shares margin. Merchants earn an average additional income of INR1,500 per month from the bank, with some earning as high as INR60k. Overall, the bank is looking to increase its merchant count to 3x over the next twoto-three years

Gross margin stood ~33%; take rates healthy across products

The blended gross margin for the bank stood ~33%, with a take rate of ~60bp in 9MFY22. Within the Micro ATM and AEPS business, margin on transactions through its own channel (70% of total transactions)/open banking stood ~50%/~15%. The take rate stood ~33bp. The Remittance business has a margin of ~10% and a take rate of 87bp.

Gross margin for CASA products stood at 55% in the first year and 70% from the second year onwards, while the same for CMS stood at 45% (take rate of 0.24%). Overall, PAT margin stood over 5%/3.5% in 3Q/9MFY22.

Profitability remains healthy; aimsto deliver over 20% RoE

Profitability remains healthy as PAT grew 116%/95% YoY to INR141m/ INR251m in 3Q/9MFY22. The bank reported its highest ever quarterly profit in 3QFY22 and has been maintaining its profitability for eight consecutive quarters. The management said operating leverage will continue to kick in and expects PAT to grow faster than overall revenue growth. RoE stood ~18% in 3QFY22, and the management is aiming to deliver a RoE of over 20% in the near term

Other takeaways

Around 75% of its total business accrues from rural India.

Fino has disbursed loansworth INR1.3b/month for partner Banks on which it earns a take rate of 1-2.5%.

It does not undertake any FLDG or underwriting/operational/credit risk.

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