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Hold AU Small Finance Bank Ltd For Target Rs.1,200

Attrition at top level remains key challenge; business momentum sustained in Jul/Aug’21

AU Small Finance Bank (AU SFB) hosted an update call to address the key concern around higher attrition at the top-management level, triggered by resignation of Chief Risk Officer and Head of Internal Audit. The call was led by Chairman of the Board - Mr. Raj Vikas Verma, Chairman of NRC Committee - Mr. M S Sriram and MD & CEO Mr. Sanjay Agarwal. Key takeaway was the Board taking the ownership, ensuring no lapses in internal control and processes, and highlighting the strength of internal controls & strong risk management practices.

While it believes attrition is the key challenge of late, it is more due to location issue (few key positions are based out of Jaipur) rather than culture issue. AU SFB remains committed in addressing this concern and is open to retain talent by offering employees the option of working remotely, helping them in settling down in Jaipur etc. Amid economic challenges for the industry, AU SFB’s ability to sustain asset quality and manage attrition will be key monitorables. Maintain HOLD with revised TP of Rs1,200 (earlier: Rs1,250) to factor near-term concern around attrition.

* Internal recruitment for CRO position. Recent resignation of CRO Mr. Alok Gupta and Head of Internal Audit Mr. Sumit Dhir raised concerns over increasing attrition at top level. Notably, outgoing CRO, Mr. Alok Gupta replaced Mr. Mayank Markanday (the then-CRO) who has taken charge as Chief of Credit Card business within the organization after serving as CRO from August 2016 to March 2021. It appointed Mr. Deepak Jain as new CRO, who has been with AU for >11 years in positions of CFO and COO. It highlighted that the key reason for attrition is a location issue than cultural issue given both the roles, CRO & Head of Internal Audit, were based out of Jaipur.

* Attrition remains the key challenge, but the SFB is committed to manage it in the best possible manner. The Board acknowledged the challenges in retaining talents due to locational issue with Jaipur being its corporate headquarter and professionals joining the bank belonging to other cities. However, with its fully digitised operations and processes, it does offer work from remote location option to minimise attrition arising out of geographical constraints. While we note during build-out phase (>5 years as SFB) attrition does remain high, retaining talent to build sustainable long-term business model is equally important. Thus, HR management over the next couple of quarters is the key monitorable.

* Business momentum sustained in Aug’21. During the call, the management stated business momentum sustained in Jul/Aug’21, in terms of disbursements and collections.

* No divergence in audit report. The Board also highlighted that the bank has gone through three audit cycles by the regulator (RBI) and no material observation has been flagged off which requires disclosures.

* Key risks. Upside risk – lower-than-anticipated provisions in Q2FY22, and downside risk – further attrition at top level.

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