SBFC Finance Ltd (SBFC) Q2FY27 Concall Transcript - Sep-2026 Qtr
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Moderator: Ladies and gentlemen, good day and welcome to the SBFC Finance Limited Q2 FY '27 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. Please note that this conference is being recorded. I now hand the conference over to Mr. Gaurav Toshniwal from ICICI Securities. Thank you, and over to you, sir.
Gaurav Toshniwal (ICICI Securities): Yes, thank you, Steve. Hi, good morning, everyone and welcome to SBFC Finance Q2 FY '27 earnings call. On behalf of ICICI Securities, I would like to thank SBFC management team for giving us the opportunity to host this call. Today, we have with us the entire top management team of SBFC, represented by Mr. Aseem Dhru, Executive Vice Chairman, Mr. Mahesh Dayani, MD and CEO, Mr. Sanket Agrawal, Chief Financial Officer and Mr. Rajeev Deoras, Chief Risk Officer. I will now hand over the call to Aseem for his opening remarks and then we will open the floor for Q&A. Over to you, sir.
Aseem Dhru (SBFC Finance Ltd): Thank you, Gaurav. Good morning, everyone. The world as we have always knew it is in a kind of a reset. Geopolitics, geoeconomics, deglobalization, anti-immigration and breakdown of a rules-based order that we have been used to. In addition, it is readjusting to the changes AI is bringing in into into everything every every domain of life. Volatility and disruption are the new normals. In India, the impact of the three Fs, fuel, fertilizer and foreign exchange on top of a super El Nino is juxtaposed with a resilient domestic demand. There are 10 major schools of economic thought in the world, classical, neoclassical, Keynesian, Austrian, Marxism, etc. But what we're seeing defies all things we've been taught. The Fed trying to force the 10-year down, when it succeeds even temporarily, even gold and Bitcoin both go down, which could basically mean it's a risk-off. The US 10-year crossing 5%, any economic theory would tell you, you know, would lead to a stock market crash, but that's not what we're seeing. Honestly, it's getting increasingly difficult to make sense of the macroeconomic reality of the world we live in. As we speak, economic cycles, political cycles, commodity cycles, currency, interest rate cycles, liquidity cycles are in motion, and these usually lead to an eventual credit cycle. However, the causal relationships we have been taught in economic textbooks no longer work in a world where deficits and currency printing has gone out of control. Frankly, and thankfully, for a company as small as SBFC, these questions are above our pay grade. We have to manage to keep our little boat safe in this tempestuous ocean. If you listen to the last 3 years of quarterly calls, we have always been cautious and continue to remain so. Take, for example, interest rates. 10-year Indian G-Sec at 7.47% is up almost 65 basis points in this cycle, and more, so surely, more rate rate rate hikes are coming. These aren't controllable for us. What, how how we manage our borrowing costs and reprice our variable-rate portfolio of loans is in our hands, and we will focus on the controllable. We don't have to worry so much about the health of the economy at our size. We just need to worry about choosing our customers better, using technology better, becoming more efficient producers, enabling us to deliver the ROAs, squeezing the opex and credit costs. In a world of constant flux and chaos, we are trying our best to continue to deliver boring results. With this, I hand over the call to Mahesh.
Mahesh Dayani (SBFC Finance Ltd): Thank you, Aseem. Good morning to all. There is never a dull moment in financial services. We began the year with a war that fueled inflation, and we ended up with a 25 basis rate increase. We are now debating the possibility of further rate increases, dealing with a deficient rainfall,
Mahesh Dayani (SBFC Finance Ltd): music gets louder and you wonder what the next verse will be. But once the dust settles you find yourself relishing the drama. We are building SBFC to deliver consistent quarterly performance despite the noise. This is our 36th consecutive quarter of execution since listing and we have delivered sequential AUM and profit growth within our guided range of 5 to 7% per quarter. It may not make for an exciting headline but in lending consistency is a competitive advantage. What made this quarter special was the 15% ROE on a low leverage of 2.3 while recognizing cost upfront and not front-loading income. For years this number sat in a cell in our Excel model. It is satisfying to see an aspiration translate into a reported performance. Let me now return to the key priorities we outlined last quarter: growth, margins, efficiency and asset quality. On growth, we are witnessing an interesting shift in the lending landscape. With a more cautious approach to risk, private and public sector banks are increasingly moving towards higher ticket prime borrowers where the credit profile is significantly stronger and pricing in single digits. Needless to add, there is very little blood on the report card. The Micro MSME category, which is a sub-7 lakh category, has seen some stains on the progress report with delinquencies touching more than 4% for the industry. This creates a meaningful headroom in the 10 to 25 lakh and 25 lakh plus segment, which is where we have repositioned our business through our own book and co-lending. A direct co-origination model is like a large ship. It does not turn overnight. But once it changes direction, the momentum can be substantial. The change is to make the turn early enough and stay the course long enough to see the benefits. MSME grew, MSME disbursements grew 6% in the quarter to 855 crores. This is the third straight quarter of growth since we repositioned our lending mix in quarter two last year. You cannot reliably you cannot reliably predict every turn in the cycle, but you can prepare your business to respond to it. This is precisely what we have tried to do. MSME stood at 9,669 crores, growing at 18%, of which the on-book grew at 20% and co-origination at 10%. We have repositioned our lending mix, strengthened our focus on secured MSME customers, and are now seeing the early benefits of that transition. Co-origination has returned to 112 crores from 78 crores last quarter. This supports our growth ambition even as the sub-7 lakh segment continues to run down. Gold loans have held up well. Each branch is adding approximately 40 lakhs a month in net growth. That's roughly 1.2 crores per branch per quarter. We added overall 275 crores in quarter two. Gold has survived wars, inflation, currency crises and several financial cycles. Its resilience is one reason it remains an important asset class. But resilience should not be mistaken for immunity. We respect the product, understand its risks and have no intention of overleveraging it. Overall, our AUM stood at 12,592 crores, up 6% quarter-on-quarter and 27% year-on-year. We continue to guide for a 5 to 7% growth on a quarterly basis from here on. Our approach to growth is straightforward. We want to grow where we have an edge, in segments where the risk-adjusted returns make sense and at a pace our balance sheet can comfortably support. Margins and efficiency: Yields held up at 18%, up 10 basis points, while our cost of funds stood at 8.41%. We maintained surplus liquidity of more than 1,000 crores through the quarter, thanks in part to the work of our CFO Sanket. I would encourage you to question him hard on the details. Spreads came in at 9.6%, up from 9.4% last quarter and above our guided range of 9%. While this is a welcome outcome, please do not pencil in 9.6% in your models as the new norm since competitive intensity in gold is rising and some pricing rationalization is likely. There is useful distinction between a number that looks good today and an economics model that continues to work tomorrow. We would rather preserve the the latter. On operating efficiency, before we get into numbers, let me spend a minute on how SBFC runs today because it is the foundation under everything else you will hear this morning. Our customer journey is digital by default
Mahesh Dayani (SBFC Finance Ltd): compliant by construction. In September, 100% of our customer KYCs were were completed digitally, Aadhaar OTP of face auth authentication, and 87% of our disbursements were e-signed. Account Aggregator was at 54%, all built into Sahayak, our in-house origination platform. I want you to register what that means. Governance, compliance and efficiency are no longer three functions we run in parallel, they are one outcome on the same platform. In September, 73% of our disbursements used AI-assisted personal discussions, 4,000 AI personal discussions in eight language. So, a credit officer, whether he's in Hapur or one in Yelahanka, are working from the same quality of conversation. In October, our first full pre-due collection cycle was run entirely by by AI voice. More than 4 lakh calls made to 35,000 accounts, 84% reached, 53% paid with no human caller, absorbing the workload of roughly 60 60% team. So, when you look at the numbers that follow, I would ask you to see them for what they are. Not growth that technology made possible, but growth that technology made safe. Opex declined to 4.07%, down 22 bps quarter-on-quarter. On a half-year basis, it was 30 base 30 basis points lower year-on-year. We continue to guide for a 25 basis reduction in opex for FY '27. The objective is not to become the cheapest operator in the market, it is to become a more efficient operator without compromising the quality of our franchise. Last quarter, I described the increase in zero plus delinquencies as our homework. This quarter, the position has stabilized, and credit costs declined to 1.37% from 1.44%. We have also been deliberate in provisioning through the transition away from the micro MSME lending, building a provision of 2%, which is the highest in secured lending. Our preference is to make sure that we are properly equipped before the tide turns. We bought the umbrella while the sun was shining so that if a difficult winter arrives, we are prepared. Coming to what really matters, PAT. We ended PAT at 139 crores for the quarter, up 7% quarter-on-quarter and 27% year-on-year. ROA stood at 4.6% and ROE at 15.04%. After all the headwinds, regulation, and badminton birds, the bottom line did what it always does: it turned up on time. The first rule of compounding is to never interrupt it unnecessarily. We have now delivered 36 consecutive quarters of growth, and we intend to protect the streak with the same discipline that built it. We will not chase excitement. We will deliver consistent, predictable, and deliberately boring outcomes. As Charlie Munger observed, "The big money is not in the buying and selling, but in the waiting." With that, I will hand over to Sanket to take you through the details financials.
Sanket Agrawal (SBFC Finance Ltd): Thank you, Mahesh. Good morning, everyone. I'll cover borrowings in detail, combining it with margins before we move to other numbers. Given the macro environment post the Middle East war started in Q4 FY '26, we expected tightening of liquidity and also sensed the reversal of interest rate environment. To this effect, we decided to keep more liquidity in our books, one, to ensure that no external shock derails our growth plan, and two, it gives a good cushion to negotiate with the lenders. Towards the end of Q1, as the market opened up from the war, we borrowed more than 2,000 crore and strengthened our borrowings with closing liquidity of 1,864 crore. This quarter, we've continued to carry the excess liquidity with closing number of 1,782 crore. The average daily borrowings were close to 600 crore in Q1 and more towards 2,000 crore in Q2. Our LCR is at 194%. So, that's that's on the liquidity part. In terms of cost of funds, our borrowing cost is 8.41% for the quarter, which is 55 bps down year-on-year and 1 bps down quarter-on-quarter. Now, as we stand with repo increase of 25 bps, we will see some repricing of our book, which has a mix of benchmark it is linked to. We have half our book linked to MCLR, close to 20% linked to repo rate, with other portion being T-bill and other external benchmarks with a small portion of fixed rate loan as well. On the asset side, we have largely a variable book on MSME loans, and therefore we will be able to protect the P&L from the repricing of borrowing book. We therefore do not see a material compression of spreads for the reason of rate increase in the environment currently. Our yields are at 18%, which is currently above our guided range of 17.5%.
Sanket Agrawal (SBFC Finance Ltd): Our AUM for September is at 12,592 crore, with a growth of 27% year-on-year and 6% on quarter-on-quarter basis with 100% of our book being secured. Our MSME AUM is at 9,669 crore, which is 77% of our AUM, with a growth of 18% on year-on-year basis and 4.3% on quarter-on-quarter basis. Our MSME disbursement for the quarter stands at 855 crore, with a growth of 6% on quarter-on-quarter basis. This has seen good momentum since December 2025, wherein we did 699 crore, then moved to 785 crore, which further increased to 809 crore in Q1 and 855 crore now. We may see some increase in ticket size considering we are not being doing the below 7 lakh ticket segment. The loan against gold AUM is at 2,906 crore. We have fronted the branch expansion in H2 of FY26 and, therefore, we have only added one branch during the quarter and six branches in the half year, bringing the total branch count to 257 as of September 2026. In terms of our cost, the the OpEx was slightly elevated in Q1 due to the branches opened in Q4 2026 and the increments that were rolled out. As operating leverage kicks in, we are now 22 bps lower quarter-on-quarter at 4.07% and we'll continue to see this reduction over the next two quarters. Our GNPA is at 2.64%, which has reduced by 13 basis points year-on-year and 2 basis points quarter-on-quarter. We have a PCR of 42.24%. Consistently above 40% over the last two to three years. Our credit cost for the quarter is 1.37%, which is 8 bps lower than the last quarter. It seems that the last quarter was the peak of credit cost unless we see a significant impact of El Nino impacting in the immediate future. We do not currently see signs of it affecting the portfolio, but we continue to remain watchful even at a region level. It is worth noting that now our balance sheet provisioning is 2% of our loan assets. In terms of return ratios, our return on average AUM is 4.58%, with ROE is at 15.04% for the quarter. We've been conservative all through our journey when it comes to P&L. We never upfronted income from co-origination or similar transactions. We have kept PCR double of what the segment requires. We provide 2.3x of what the regulatory IRAC norms require. We now also carry excess liquidity in balance sheet, which has its own cost of carry and despite all this, we've reached a ROE of more than 15% with debt-equity only at 2.31 times. The idea has always been that can we upfront the mitigation of all the risk we can see, project it, provide for it and yet make the returns. From here on, we can see expansion in our return metrics, considering a long runway of growth before we need to raise further capital. Our PAT for the quarter is 139 crore, growing 27% on year-on-year basis and 7% on quarter-on-quarter basis. In terms of our capital position, our Capital Adequacy Ratio is sufficient at 31% with tangible net worth of 3,789 crore as of September 2026. We should be good till at least an AUM of 20,000 crore before we need to raise further capital. So, summarizing the P&L for the quarter, yields are up, cost of fund is slightly down, OpEx have reduced, credit cost have reduced and ROEs have improved. Despite the tough environment, we have revision in outlook of our ratings by CARE and India Ratings from stable to positive. With scale in our sight, robust unit economics model, conservative provisioning policy, and a well-diversified liability franchise, we continue to move forward in our journey of predictable compounding. With this, we open the floor for questions and answers.
Moderator: Thank you, sir. 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 handset 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 Ankit Kanodia with Smart Nivesh Advisors. Please go ahead.
Ankit Kanodia (Smart Nivesh Advisors): Yeah. Thank you so much for taking my question and congratulations on such a good number at this kind of macro environment. So, I just have one question related to the gold loan which we have having, and which we are growing at a very good pace, it has now reached 23% of our AUM. So, I have a two-part, one question. One is we our presentation is so good in terms of when it comes to details of our MSME loans. If we can provide more granular details about our gold loan AUM
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