AU Small Finance Bank Ltd (AUBANK) Q2FY27 Concall Transcript - Sep-2026 Qtr
Moderator: Ladies and gentlemen, good day, and welcome to AU Small Finance Bank Q2 FY27 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. I now hand the conference over to Mr. Prince Tiwari, Head of Investor Relations and FIG, AU Small Finance Bank. Thank you, and over to you, sir.
Prince Tiwari (AU Small Finance Bank Ltd): Thank you, Rutuja, and good afternoon everyone, and welcome to AU Small Finance Bank's earnings call for the second quarter of financial year 26-27. We thank you all for joining the call this evening. On today's call, from manage--
Prince Tiwari (AU Small Finance Bank Ltd): we have our Founder, MD and CEO, Mr Sanjay Agarwal, our Executive Director, Mr Uttam Tibrewal, our CFO, Mr Gaurav Jain and IR team. CFO sir will start today's call with 15 to 20 minute opening remarks, highlighting the bank's performance, positioning, and outlook. We'll follow the opening remarks with a 40 to 45 minutes of Q&A from participating investors and analysts. For the benefit of all participants and so that we can take everyone's questions, we would humbly request everyone to keep the number of questions restricted to two per participant and join back in the queue in case you have further questions. For any data-keeping questions, you may kindly reach out to the IR team anytime post this call. With that, I now request Gaurav to share his opening remarks.
Gaurav Jain (AU Small Finance Bank Ltd): Thank you, Prince. Good evening everyone and thank you for joining us for our Q2 FY27 earnings call. Q2 was our 38th quarter as a commercial bank, and over the past decade, we have navigated a dynamic operating environment while strengthening our balance sheet, building multiple growth engines, investing in technology and talent, and maintaining a sharp focus on risk management and governance. Q2 was another quarter where the bank demonstrated resilience and strong operating performance amidst a challenging macroeconomic backdrop. The operating environment in this quarter continued to be influenced by geopolitical risk and monetary policy tightening, with MPC raising policy rate by 25 basis points to 5.5% and shifting stance to calibrate calibrated tightening. While domestic activity and credit demand remained healthy, we remained watchful of the implications on liquidity, deposit pricing, loan yields, and demand. Now, let me walk you through the key highlights of our performance in Q2. Our deposits grew strongly by 29% year-on-year and 8% quarter-on-quarter versus banking system growth of 18% year-on-year. This was despite not meaningfully participating in the strong FCNR inflows in the banking system due to our limited overseas footprint. We garnered around 230 million USD of FCNR deposits on a gross basis in Q2. CASA deposits deposits continue to see strong growth at 29% year-on-year and 11% quarter-on-quarter, with CASA ratio sequentially improving 70 basis points to 29.5% from 28.8% in Q1. Loan portfolio grew 25% year-on-year and 7% quarter-on-quarter against banking sector credit growth of 19%. Secured assets, which remain the foundation of our lending franchise, grew by 26% year-on-year and 5% quarter-on-quarter. Unsecured businesses grew 23% year-on-year and 8% quarter-on-quarter, led by microfinance and personal loans. Disbursement for the quarter was up by 33% year-on-year, driven by broad-based growth across businesses. This balance sheet growth translated into healthy operating performance. Net interest income increased by 32% year-on-year on the back of strong growth in loan portfolio and 33 basis points YoY expansion in margin. Sequentially, margin declined by 9 basis points to 5.8%, driven by higher share of investment, total assets, and seasonality. Sequential loan spread remained broadly stable with decline in loan decline in loan yields of nine bps largely being offset by seven basis points decline in cost of fund. Core fee income grew by 16% year-on-year, driven by healthy business volumes. Treasury profits were lower on a YoY basis, leading to muted total other income growth of 8% year-on-year. Operating expenses increased by 26% year-on-year, driven by growth in disbursement volumes and continued investments in distribution, brand, and technology. Operating leverage continues to play out on underlying basis, with cost-to-assets ratio excluding guarantee premium improving from 4.1% in Q1 to 3.9% this quarter. We expect cost-to-assets ratio to improve year-on-year on a full-year basis. Core PPOP grew by 31% year-on-year to 1,480 crore while whereas provisions declined by 25% to 359 crore, largely led by normalization in unsecured businesses. Asset quality metrics remained stable during the quarter. Slippage ratio improved on a year YoY basis to 2.6% versus 3.3% a year ago, supported by improvement in unsecured businesses, while slippages in the secured assets remain stable. GNPA ratio declined by 42 basis points year-on-year to 1.
Gaurav Jain (AU Small Finance Bank Ltd): 5.9%, and credit cost, including guarantee premium, declined by 45 basis points year-on-year to 0.8%. Profit after tax grew 53% year-on-year to 858 crores compared to 561 crores in Q2 FY '26. ROA for the quarter improved to 1.7% versus 1.4% in Q2 last year, and ROE improved to 16.1% versus 12.4% in Q2 last year. For the first half of FY '27, profit after tax improved by 45% year-on-year to 1,654 crores compared to 1,142 crores in H1 FY '26. Similarly, ROA and ROE improved to 1.7% and 15.8% respectively, compared to 1.4% and 12.9% for the same period last year. In terms of other strategic updates, we continue to invest in our people, distribution, branding and technology to strengthen our foundation for the next phase of our growth. During the quarter, we added around 2,400 employees, largely in customer facing roles to support our increased distribution, with 45 new deposit branches and 100-plus asset centers added in Q2. We also strengthened our senior leadership team with Mr. Anil Agarwal joining as senior executive group head to lead our commercial and institutional banking business, and Mr. Amol Phaty formally assumed the role of Chief Risk Chief Risk Officer. We've also stepped up our brand investments across television, print, and digital media, with association with Kaun Banega Crorepati being a prominent investment. This month, we also inaugurated our new corporate office in Mumbai, marking an important milestone in our journey. In the next few months, our entire senior leadership will be co-located in this office, bringing us even closer to the broader financial ecosystem. In terms of our credit ratings, on 1st October, ICRA Ratings upgraded our credit rating outlook to positive from stable, while reaffirming our long-term rating at double A. Coming to our technology and AI initiatives. As announced last quarter, our tech strategy is organized across three pillars of run, build, and transform, with dedicated teams and leadership for each area. Run and build capabilities are enabling the bank to scale faster, while serving customers more intelligently, at lower cost and in uniformity. Transform pillar is focused on ensuring AI adoption at scale and moving AI from individual use cases to an enterprise operating model. Our deterministic, agentic AI platform is a framework of responsible AI, human-in-the-loop governance, model explainability, full audit auditability, zero trust security with real-time risk monitoring. This enterprise wide automation is driving straight-through processing and cross-sell. Our investments in data lakehouse and analytics platform has started to show some traction. For example, our cross-lead platform together with voice AI enabled 5% of our total disbursements in Q2. Importantly, this automated customer coverage led to 50% operating cost savings led by voice AI disbursements. Additionally, the scorecard led underwriting model delivered 500 crore-plus of disbursement in unsecured loans during the quarter. Agentic AI LOS for gold loans is showing promise with over 2,500 loans disbursed till date, delivering faster turnaround times and superior customer service across 40 branches. Increasingly, the bank is focusing on scaling agenti- agentic AI journey to wheels, mortgages, and commercial loans, while redesigning five priority back office and control functions as AI-native workflows. Overall, our technology investments remain focused on deliveri- delivering measurable business outcomes while creating a scalable foundation for sustainable growth and long-term differentiation. Now, let me provide some color on our key businesses, starting with deposits. Our liability franchise is classified into two broad verticals: Branch Banking and Commercial and Institutional Banking. Branch Banking forms around 60% of our total deposits and focuses on relationship-led customer acquisition and servicing. Commercial and Institutional Banking now comprises all other deposit ver- verticals including Government Banking, Commercial and Wholesale Banking, FIG and Capital Markets, where the mandate is to build a stronger current account-led deposit franchise through deeper solution-led engagement across transactional banking, cash management, Forex and Institutional Banking. In Q2, total deposits grew 29% year-on-year, up
Gaurav Jain (AU Small Finance Bank Ltd): by a strong growth of 55% in CA balances and 23% in SA balances. On a daily average basis, CA balances grew 60% year-on-year, whereas SA balances were up 24% year-on-year. New CASA account acquisition during Q2 also remained strong with 45% year-on-year growth in acquisition of premium accounts. During the quarter, bank also received SEBI approval for providing UPI sponsor sponsorship services under the ASBA framework for IPOs and public issues. This will strengthen our capital markets and transaction banking proposition, and help bank position itself as banker to an issue for public market issuances. The strong deposit performance reflects several strategies coming together: sharper segmentation, dedicated liability channels, wider distribution, stronger brand, and an improved customer proposition. These capabilities, built over several years, are now translating into stronger acquisition and more granular, broad-based growth. We are encouraged by the progress, but remain focused on sustaining it with the right mix, pricing discipline, and quality of deposits. Moving on to our assets franchise. Retail secured assets comprising Wheels, Mortgages and Gold loan form 66% of our portfolio and grew 22% year-on-year and 5% quarter-on-quarter. Within retail, Wheels book crossed the 50,000 crore milestone this quarter and grew 27% year-on-year and 6% quarter-on-quarter to reach 51,000 crores. Growth was driven by strong demand in the new vehicle segment as well as increasing disbursement traction across newer geographies. Gold loan business grew 102% year-on-year and 4% quarter-on-quarter to 4,700 crores. Mortgage business comprising micro business loans and affordable housing grew by 12% year-on-year and 2% quarter-on-quarter with growth largely being led by MBL and/LAP business, where disbursements are up 17% year-on-year. As mentioned in the past, we are not looking to chase affordable housing loan growth given our cost of funds and the competitive indus intensity in the segment. Moving on to Commercial Banking. This business grew 39% year-on-year and 8% quarter-on-quarter to 35,300 crores with broad-based growth across sub-verticals. Transaction banking and forex income grew by 51% year-on-year, reflecting improving product penetration and stronger customer engagement. With growth remaining robust, focus in Commercial Banking is to become progressively self-funded with every lending, supply chain and corporate banking relationship having a current account, CMS, or collections and payments proposition attached. Now, moving on to unsecured businesses. Our Inclusive Banking franchise, which primarily includes SBL and FI, grew 23% year-on-year and 6% quarter-on-quarter. Collection efficiency was stable at 99.6% and 99% of the book is covered under the CGFMU guarantee scheme. Our digital unsecured portfolio also reported a strong growth of 23% year-on-year and 14% quarter-on-quarter. Personal loans grew by 81% year-on-year and 31% quarter-on-quarter off a low base, supported by analytics-led cross-sell and calibrated new-to-bank acquisition. The Credit card book saw marginal growth with one with 1.5 lakh new cards issued in the quarter. To conclude, Q2 reflects continued progress across our deposit franchise, lending businesses, and profitability. As we look ahead, our focus remains on building the institution ahead of its scale by strengthening governance, leadership, and organizational capabilities while simplifying processes and leveraging technology, data, and AI to improve customer experience and productivity. While we remain watchful of the operating environment, the investments we have made in our businesses, teams, and distribution provide us a strong foundation to pursue growth with discipline, granularity, and consistency. We remain confident in our ability to compound sustainability, deliver predictable performance, and create long-term value for all our stakeholders. I would like to thank our teams for their commitment and all our stakeholders for their continued trust in us. With that, I now hand hand it over to Prince for Q&A.
Prince Tiwari (AU Small Finance Bank Ltd): Thank you, Gaurav. Rutuja, we can now open the floor for question and answers.
Moderator: Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may please press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question.
Moderator: Ladies and gentlemen, we will wait for a moment while the question queue assembles.
Moderator: The first question is from the line of Akshay Jain from Autonomous. Please go ahead.
Akshay Jain (Autonomous): Hi, sir, and thank you for the opportunity. Sir, two questions. First on your margins. So, I I can see that, you know, margins have declined by 9 basis points quarter-on-quarter, and you have attributed higher investments as the reason behind it. So, my question is on this liquidity. Like, you have seen a deposit growth of 8% QoQ, and even if you adjust it for FCNR, it is strong at 6.7%. So, what's driving this strong deposit growth? Is it, you know, some one-offs or is it because, you know, the larger banks have vacated the domestic deposits space for FCNRB? So, you know, what should be the sustainable deposit growth incrementally and also the margins?
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