ESAF Small Finance Bank Ltd (ESAFSFB) Q2FY27 Concall Transcript - Sep-2026 Qtr
Moderator: Ladies and gentlemen, good day, and welcome to ESAF Small Finance Bank Q2 FY '25 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 touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. K. Paul Thomas, Managing Director and CEO. Thank you, and over to you, Mr. Thomas.
K. Paul Thomas (ESAF Small Finance Bank Ltd): Thank you, and good afternoon, everyone. We welcome you to the Q2 FY '25 earnings call of ESAF Small Finance Bank. Joining me today are my colleagues, Mr. George K. John, Executive Director, and Mr. Girish CP, EVP and CFO. I would like to begin by highlighting a significant achievement for the bank this week: the successful implementation of ESAF 2.0, our flagship digital and IT transformation program, Start Next. This marks an important milestone in ESAF Small Finance Bank
K. Paul Thomas (ESAF Small Finance Bank Ltd): Transformation journey and reflects our commitment to building a future ready technology enabled bank. The successful implementation has strengthened our technology backbone and established a more scalable and resilient platform for the bank's future growth. Over time, we expect this investment to enhance operational efficiency, productivity, automation and customer experience, while strengthening risk management and control mechanisms. StarToNext is a key enabler of our broader structural transformation strategy, supporting portfolio diversification, business scalability, and the strategic expansion of our banking network. We believe this modern technology foundation will position the bank to pursue its long-term growth ambitions more effectively over the coming decade. I would like to place on record my sincere appreciation for our employees, especially our Executive Director Mr. George K. John, who oversaw this strategic transformation program, and our technology partners, for their commitment, collaboration and collective efforts in successfully delivering this complex program. I would also like to thank our customers for their continued trust and support throughout the migration. This is an important milestone for ESAF, providing a strong technological foundation to support our next phase of transformation and sustainable growth. Our transformation journey continues with the MARG portfolio as the key anchor supported with the renewed focus on the emerging household loan category. While Emerging Household portfolio has become more than doubled as compared to last year, the MARG portfolio has maintained its trade, steady growth every growth rate every quarter. The growth is not dependent on any individual segment, but it is broad based with all the constituent segments of MARG and EH showing strong growth, both on YoY and quarter-to-quarter basis. MARG portfolio continues to maintain lower delinquency, but complementing it with the EH portfolio comprising of customers with an established repayment track record and growing income profiles, has helped us in further improving our asset quality. Our financial performance has improved significantly and continued its positive trend on the back of our strategic transformation and focus on operating efficiency. Our objective is to build a well-diversified retail franchise with Secured Lending, Emerging Households, Microfinance and deposits complementing each other. This will be further supported with continued investments in technology and innovation in to deepen customer engagement and provide best-in-class facilities to customers. We will continue to build on the strength of our network, majorly present in rural and semi-urban areas, to provide a wider range of banking products and financial solutions to customers. All our strategies have been built with a clear focus on creating a stable, diversified and resilient asset base that is supported by disciplined execution, investment in technology, prudent prudent risk management, strong governance and operational efficiency. At the same time, the bank has established itself as a front-runner in integrating environmental and social stewardship into its core business operations. Through a wide range of purpose-driven initiatives and strategic projects, the bank actively promotes sustainability and social well-being across the communities it As a result, our CARE ESG rating has improved from 75.4 to 77.6. This bank has been rated higher than the industry in all three aspects of environmental, social and governance, thus reflecting our continued progress towards responsible and sustainable growth. On the macro front, the Indian economy appears to be resilient, through the though the RBI raised its FY '27 GDP growth forecast to 7.1% in the latest MPC meeting, it also increased the repo rate by 25 basis
K. Paul Thomas (ESAF Small Finance Bank Ltd): with a shift to calibrated tightening as inflationary pressures persist. We remain cautious and watchful for the increased volatility in in global energy prices and and the persisting El Nino conditions. These events have not been not had any material impact on our business of or operating performance as of now. So the overall performance in H1 FY '24 in terms of total business growth, secured portfolio diversification and improved financial parameters gives us confidence that we are moving in the right direction with a with regards to people, technology, systems, asset quality and risk management for our next phase of growth. I now invite our Executive Director Mr. George K. John to take you through the next segment.
George K. John (ESAF Small Finance Bank Ltd): Thank you, Paul sir, and good afternoon everyone. During the quarter, improvement across key parameters continued sequentially, including improved profitability and asset quality metrics, supported by modernization, industry pages and better operating efficiency. As of September 30th, 2023, our total business stood at Rs. 32,399 crores, registering a healthy year-on-year growth of 35% compared to Rs. 24,031 crores of last year. During the same period, the gross advance grew by 35%, while deposits increased by 34%, reflecting balanced growth across both sides of the balance sheet. If we add IBPC transactions done during the quarter, our total business stands at Rs. 33,449 crores. Total deposits grew by 34% Retail deposits remain strong at 90% of total deposits, while CASA stood at 23.3%. Our Liquidity Coverage Ratio stood at 141.48% as of 30th September, 2023, indicating a comfortable liquidity position. Our liability strategy remains centered on granular retail deposits and have strategically deepened customer relationships for improving the quality of our our funding base. As a result, our retail deposits have crossed a milestone of Rs. 15,000 crores this quarter to reach Rs. 15,479 crores. Total gross advances grew by 35% Y-o-Y. Secured loan book grew faster at 35% Y-o-Y, whereas the unsecured loan book, consisting of microfinance business, grew by 15% Y-o-Y. Secured business now stands at 26% of the total gross advances. An improvement in portfolio mix towards secured assets and an improved collection efficiency is driving improvement in asset quality. The secured book is driven largely by the MR portfolio as it definitely represents our strategy to increase secured retail lending. In Q2 FY '24 at Rs. 7,938 crores, the MR portfolio has has grown by 33% Y-o-Y and constitutes 58% of the total portfolio. This quarter a major constituent of MR, that is the gold loan portfolio, crossed Rs. 2,000 crores in gross advances to reach Rs. 2,456 crores. Portfolio quality is good and remained stable, with GNPA at 0.1%. We saw strong growth in all other constituents also, driven by effective execution and tailor-made offerings. Agri, gold, mortgage and retail continued their strong performance with Y-o-Y growth of 66, 79, 39 and 34%, respectively. As mentioned the last quarter, our renewed focus on emerging household segments is reaping good dividends. This segment has grown 134% Y-o-Y and 5% quarter-on-quarter, while contributing 42% of total gross advances. The segment has been broadly classified into Individual, Enterpreneur Enterprises and FIG, that is Farmers Interest Group. While FIG has remained stable, the Individual and Enterprise portfolio is evolving rapidly with strong Y-o-Y and sequential growth.
George K. John (ESAF Small Finance Bank Ltd): friends and who has a good repayment history. Hence the portfolio quality is good and significantly improves the bank's overall asset quality. Microfinance loans portfolio, comprising of group loans has degrown by 65% YoY. But the decline in this portfolio is aligned with our strategic direction. Rather than forfeiting customer relations, we are progressing eligible borrowers to individual and secured lending relationships under the emerging household portfolio. We are adopting a calibrated approach to our microfinance portfolio and are comfortable with our current portfolio size, as we aim to preserve yield and reduce volatility. During the quarter, we added 10 new banking outlets. And now, our and our and our and our distribution footprint stands at a total of 831 banking outlets, 722 ATMs, 1,060 customer service centers, and 31 institutional business correspondents across 24 states and two union territories, enabling deep customer reach and connect. We have we have already mentioned over the last couple of calls about ESAF 2.0 Starburst project, which is our key strategic digital and IT transformation program. I'm pleased to share that ESAF Small Finance Bank successfully went live with Starburst project on 26th October, 2026, marking a major milestone in our technology transformation journey. The implementation involved migrating to Oracle's FLEXCUBE as our core banking system, alongside the the deployment of upgraded business applications and modernized technology infrastructure. Following go-live, our focus is on stabilizing operations, ensuring transaction accuracy, strengthening system performance, and supporting employees and customers through the transition. Our team are working closely with technology partners to monitor operations and address emerging issues on priority. From a strategic perspective, Starburst is not more than Starburst is much more than a core banking core banking migration. It represents a foundational investment in the bank's future operational operating model. The new technology environment is designed to support greater scalability, improve automation, stronger operation controls, and enhance digital capabilities. It will also support our ongoing business transformation, including portfolio diversification, the expansion of secured lending, improved productivity, and strategic growth of our banking network. While the benefits will be realized progressively as the platform stabilizes and business processes are are further optimized, we believe this investment provides an an important technology foundation for the bank's substantial growth over the coming decades. We remain committed to building a stronger, more resilient, and future-ready ESAF Small Finance Bank. As we move into the second half of FY '27, we continue to further strengthen our secured lending franchises through LAP, MARG, and grow the emerging household segment, maintaining a fine balance between growth and asset quality. Also, our investments under ESAF 2.0 will enhance business growth, productivity, and customer experience, thus creating a stronger foundation for the future. The improvement in in core asset quality and profitability that we have witnessed now reflect the structural changes we undertook over the last two years, and this transformation is continuous. With disciplined execution, prudent risk management, and customer-centric innovation, we aim to deliver continued improvement in our business performance in the coming years. I will now invite our EVP and CFO, Mr. Girish C P, to take you through the financial performance.
Girish CP (ESAF Small Finance Bank Ltd): Thank you, sir. Good afternoon, everyone. I thank I thank all the participants for taking time for joining us on this earnings call. Let me give you an overview of our financial performance highlights for Q2 FY '27. As of Q2 FY '27, total deposits stood at ₹28,466 crores, growing 24% compared to ₹22,894 crores last year, with a healthy CD ratio of 82%. Retail deposit increased to ₹25,475 crores, registering a growth of 15% YoY, which now constitute 89% of the total deposits. Our retail deposits reflect a stable and granular deposit base
Girish CP (ESAF Small Finance Bank Ltd): this quarter. Additionally, we have, we are also seeing good traction on our non-resident deposit base, witnessing steady sequential growth for last five, five quarters. CASA deposits grew at slower pace than time deposits to 6,645 crores in Q2 FY '27, registering a 10% YoY growth with the CASA ratio standing at 23.3%. We are formulating various measures for prioritizing quality CASA acquisition and focusing more on NTB, NR, and staff relationships to achieve the targeted CASA level by end of the year. Gross advances increased to 23,934 crore from 19,137 crore a year ago, registering a growth of 25% YoY. Our strategic priority of diversifying the loan book remains on track. The secured portfolio stood at 15,377 crore with a growth of 32% YoY, whereas the unsecured portfolio stood at 8,557 crore with a growth of 15% YoY, aligned with our strategy. Healthy asset growth, moderate NPA levels, strategic product mix, and appropriate pricing strategy translated into strong revenue momentum with total interest income reaching 1,175 crore and the net interest income increasing by 73% YoY to 643 crores. Other income for the quarter also grew by 47% YoY thanks to increased business volumes. Yield on advances continue to be in a comfortable zone with cost of funds remained largely stable in Q2 FY '27, leading to net interest margin at 8.2%. The funding cost is expected to marginally go up in Q3, but have enough cushion to absorb the current NIM levels. Lower slippages primarily on unsecured will continue to support margins, but any further upward changes in policy rates may lead to higher interest expenses, affecting the NIMs. Pre-provisioning operating profit for the quarter of 362 crore is up 289% YoY. The improvement in PPoP is expected to remain stable in H2 also. Operating expenses in Q2 FY '27 increased by 2% QoQ largely due to other opex, which grew by 4% where in, whereas employee expenses remained flat. Cost-to-income ratio stood at 58% as compared to 82% in Q2 last year. We will continue to focus on further improving operating efficiency and optimize overhead costs for the remaining year as well. The operating expenses are within comfort levels and have remained la-, range-bound sequentially. Considering the incremental opex towards technology and branch network buildup on planned lines, we aim to maintain cost-to-income ratio around 60% for the year. Normalization of asset quality issue in the MFI sector and the change in portfolio mix has led to improvement in asset quality and lower slippages. As compared to Q2 FY '26, the gross NPA for Q2 FY '27 declined significantly to 2.8% from 8.5% and net NPA declined to 0.3% from 3.8%, while slippages reduced sharply to 87 crores from 342 crores on a YoY basis. Total technical write-off for the quarter was 626 crores, probably the last lot of the legacy NPAs. With slippages well under control, credit cost on an annualized basis has reduced to 2.6%. We estimate the same to remain in the range of 2% for the full year. Our gross slippage ratio for Q2 FY '27 on an annualized basis stands reduced to 1.6% and is expected to have the same trend in the remaining fiscal. Q2 FY '27 PAT has been doubled sequentially to reach 160 crore from 80 crore in the previous quarter. ROA and ROE are reaching normalized levels and stood at 1.5% and 26.5%, respectively, on an annualized basis. We are taking steps to optimize capital consumption and have seen CRAR improvement by 20 basis points to 24.1% as of September '26. As business volumes grow,
Girish CP (ESAF Small Finance Bank Ltd): and operating leverage from our distribution network flows in, further improvement in the retain ratios are expected going forward. We believe that a strong H1 will support H2 as well through a diversified asset book, disciplined underwriting and improved operational efficiency, enabling net income growth, optimized cost ratios, favorable NIMs and NPA movement. However, we remain vigilant on the global tensions, revised monetary stance by RBI, supply chain disruptions amid geopolitical tensions and the recent weather-related issues. Our continued focus on profitable growth, disciplined risk management, operational excellence and customer-centric innovation will be further boosted with the successful implementation of our new technology platform. The investments made over the past two years have created a strong foundation for a resilient balance sheet and profitable growth going forward. Thank you very much. And now the floor is open for Q&A session.
Moderator: Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch tone 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. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question comes from the line of Amit Mehendale from Robo Capital. Please go ahead.
Amit Mehendale (Robo Capital): Thank you. So, my first question is on the you know this quarter our loan book you know has grown 3% sequentially, like quarter-on-quarter 3%, but the NII growth is about 10%. So, can you please explain the reason for higher NII growth?
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