Profit growth has been flat for the quarter gone by. What led to the flat profit growth?
You have to give us some leeway because this was our second quarter as AU Bank and I can only say that this was one of the best balanced performance we could deliver in this kind of time horizon as well as environment. I believe that AU, in terms of disbursement and yield asset quality has again given a stellar performance and we can build from here.
In terms of overall banking, we have raised around Rs 2000 crore of deposits at around 6.75%.
Our incremental cost of borrowing is around 7.45% and the asset quality remains in the range and which is the first six months and that too in retail asset, if you can keep net NPA around 2%, in my opinion, it is one of the better performances. As we move forward on the foundation of this kind of numbers, we can perform better in near future.
Let us talk about your second quarter margins as opposed to what you have posted in the previous quarter. What according to you drove the margins higher?
The focus is only on built retail asset in next two quarters. We have actually have a year-on-year growth of around 30% in our AUM and we hope to continue the same in next two quarters also. The idea is to also build a liability franchise which is the need of the hour and which is why banking is always so attractive. We had a good start. We have built around 2 lakh kind of accounts with Rs 2000 crore of book.
We believe that we have to be really focused on how we can increase our speed or increase our acquisition in this segment. Also on how our opex can be more stabilised because a lot of opex has been done on the built up of liability team, risk team, the infra and IT. That also, we can amortise as we move forward. The focus will be on these three things — asset built up and asset built up with the same speed and same growth rate and let us build liability also and of course amortise your expenses in next two quarters for better ROA.
How do you see cost of funds and yields shaping up?
Our opex has gone up a little bit because of the banking transition, but it will get amortised in the next two quarters to again come in the same range and in terms of yield because as we become bank, we are looking for growth. The yield curve will come down but our AUM is around 15.7%. It will be in the same range but our cost of funds surely will come down as we build our liability franchise on a grander scale. I think our incremental cost of funds can be around 7% by this year end.
Your gross NPAs have risen versus what you have posted in the previous quarter. What is leading to the stress?
Our NPAs are in the range which we projected but it has a three-layer effect. One because of the transition from 120 days to 90 days on a banking platform. Also because of six month of seasonality and of course because of some part of the GST also. But I do not think it will be like this in quarter three or maybe quarter four and may come back to around 2.5% as we move forward.
What are you expecting in terms of your asset quality in some of the key segments that you are currently present in?
It is difficult to comment as of now because we just started our banking operations six months back. It will depend on how and what type of asset will go in next three to five years but largely if we see AU’s history of 20 years, NPA is our first priority in terms of attention and it was always remains range bound.
We are able to price our risk, execute our collections and also showcase how well we understand the sector and the customers. I do not think that it is based on something else. We can target some specific number but year on year we will see and take the calls.
Now that you have converted into a small finance bank, how exactly would the liability side of your balance sheet move? Can you also give an example of or share numbers on your deposit growth?
Since we have become a bank, we need to rely more on the deposit and I personally feel that the kind of environment we are living in, lot of money is available in system. It is your choice at what price you want to take that money and wholesale money is also available very cheap. We are keeping the balance intact. How much you want to raise from wholesale, how much you want to raise from deposits but in a longer run of maybe two-three years — our 60% to 70% money should come from deposits. In wholesale terms, our deposit should grow 100% every year for next three years.
Tell us about your loan growth or loan book growth.
It is difficult to comment how the environment is. It is difficult to comment for two to three years but if you really see AU’s journey over last 10 years, we have not grown below 40% and we maintain that we should target anything around 40% for next two to three years.
What is the outlook on loan and book growth?
As a small finance bank, we have to lend 50% of our book, lesser than Rs 25 lakh and we had to also do 75% our priority sector markets. So, largely our product mix will be retail. As of now, 85% of our assets are retail and we will just add on housing from April onwards. Otherwise largely our asset will remain similar product range which we are doing now.
What about your MoU with SIDBI and how will this benefit your business?
This is a rarest of kind of arrangement between SIDBI and AU Bank. The MSME segment is not getting enough credit or enough fund to actually help the sector. Through this MoU, we are able to leverage the capabilities and capacity of both the institutions. SIDBI has committed that for next 12 to 15 months, they would give us Rs 100 crore of fund to help us fund the MSMEs of hinterlands, semi-urban areas where AU has the reach. Through this MoU, we have the capacity and capability to fund these MSMEs at lower cost and also share the risk with SIDBI. Overall, if this programme can be seamlessly executed in future, it can be a bigger milestone in AU’s journey as a bank.
So tell me what is the growth strategy going forward, your ROA for the first half is about 7.1%, what is the outlook then going forward because return ratios are also subdued right now, when is it that we can see a meaningful improvement?
We are a retail asset dominated bank. Our ROA in longer run or once our cost gets optimised and stabilised should come back again in the range of maybe 2-2.25% and our cost to the NIM also should come down to 45. In that case, our ROE should be around mid-teens and we hope that AU can actually do this very quickly, maybe a year starting 2020. We hope that our comeback would be faster than anybody else in the banking sector.