Prepared remarks
Ladies and gentlemen, good day, and welcome to City Union Bank Q4 FY '24 Earnings Conference Call, hosted by AMBIT Capital. Please note that this conference is being recorded. I now hand the conference over to Mr. Prabal Gandhi from AMBIT Capital. Thank you, and over to you, sir.
Thank you, Sagar. Good evening, everyone, and thank you for joining the call. We have with us Dr. N. Kamakodi, Managing Director and Chief Executive Officer; Mr. R. Vijay, Executive President; and Mr. J. Sadagopan, Chief Financial Officer, to discuss fourth quarter earnings of City Union Bank. Without taking much time, I'll hand over the dais to Dr. N. Kamakodi for his opening remarks, and then we can open the floor for Q&A. Thank you, and over to you, sir.
Good evening, everyone. A hearty welcome to all of you for this conference call to discuss the audited financial results of City Union Bank for the fourth quarter and year ended 31st March 2024. The Board approved the results today, and I'm sure you all have received copies of the results and the presentation. I'm happy to announce that we have achieved two historical landmarks in this financial year. We crossed INR 1 lakh crore of total business, and we also crossed INR 1,000 crores of PAT. The Board has recommended a dividend of 150%, including a 50% special dividend for our 120th year. Before getting into the financial results, I would like to inform you about key changes in our Board and senior management position. Our non-executive part-time Chairman, Mr. M. Narayanan retired from the Board on 3rd May 2024 after serving for 8 years in various capacities. With effect from May 4, 2024, Shri G. Mahalingam, our Director, has taken charge as the Non-executive Chairman.
Shri G. Mahalingam had over 3 decades of career with RBI, reaching the position of Executive Director, and also had a 5-year stint with SEBI as a whole-time member. He joined our Board as an independent director in July 2022. On the senior management side, Shri R. Vijay Anandh has joined our bank as Executive President in March 2024 and has more than 25 years of banking experience covering retail banking, risk management, portfolio analysis, credit appraisals, recoveries, legal, collections, and due diligence. The Board has recommended his appointment as a full-time director, which is under the consideration of RBI. Additionally, about 10 executives in the rank of AGM and above have joined our bank recently to strengthen the senior and top management, enhancing our capabilities in retail, analytics, credit, operations, etc. In our Q4 2023 earnings call, we indicated that while there could be headwinds in margin and base figure growth, we expected to close the financial year '24 with decent PAT growth, substantial reduction in net NPA, improved coverage ratio, and ROA close to our long-term average of 1.5%.
Our performance for the financial year '24 is largely in line with the forecast we shared with you during last year. Moreover, during our Q3 call, we mentioned we should achieve our 4-digit PAT growth for the financial year '24, which we have accomplished. Our NPA slippages have decreased significantly, and live NPA recoveries have surpassed live slippages, indicating we are on the right track to revert to pre-COVID slippage levels. The digital lending process is proceeding as per schedule, aimed at boosting credit growth in the coming quarters. ROAs are back to 1.5% plus, aligning with our long-term average, and our net interest margin is stable. Overall, our Q4 performance met expectations, and it has been a strong financial year for us. We have surpassed our expectation with a PAT figure of INR 1,016 crores, registering an 8% growth from the last year. In the Q4 financial year '24, our PAT recorded INR 255 crores with a growth of 17% compared to the Q4 financial year '23.
We crossed the landmark of INR 1 lakh crore business, and our total business stands at INR 1,02,138 crores as of 31st March 2024. Our deposits stood at INR 55,657 crores, marking a growth of 6%, and our advances also improved by 6%, totaling INR 46,481 crores on a quarter-on-quarter basis compared to Q3. During our previous calls, we discussed the degrowth of KCC loans and related issues that initially led to the reduction in daily average advance growth. With improved credit growth in the last quarter, we are regaining stability. As of FY '24, total slippage stands at INR 1,013 crores compared to INR 1,276 crores in FY '23. Recoveries amount to INR 1,031 crores, which comprises INR 816 crores from live NPA accounts and INR 215 crores from technically written-off accounts. In the current quarter alone, slippage is INR 219 crores while recoveries total INR 275 crores, made up of INR 233 crores from live NPA accounts and INR 42 crores from technically written-off accounts.
As stated in the last call, live recovery has consistently surpassed live slippage in the current quarter as well. The trend of recoveries exceeding slippages has contributed to the decline in both gross and net NPA numbers. As of 31st March 2024, gross NPA decreased to 3.99% compared to 4.47% as of Q3 FY '24 and 4.91% as of Q1 FY '24. Net NPA decreased to 1.97% compared to 2.95% in the previous year, signifying our ongoing success in improving asset quality. Our gross and net NPA has declined for three consecutive quarters, with net NPA falling below 2%. Furthermore, our net credit cost has notably dropped to 0.24% for FY '24 from 0.90% in FY '23. The SMA 2 numbers to total advances as of 31st March 2024 is at 2.08%. This financial year, we've on-boarded six insurance companies covering life, general, and non-life insurance, effectively doubling our insurance income contribution to INR 55 crores compared to INR 27 crores in FY '23.
We expect significant growth in the current financial year as well. ROA for FY '24 is at 1.52% versus 1.46% last year, while yield on advances for Q4 FY '24 stands at 9.83% compared to 9.31% in the same quarter last year. Throughout FY '23-'24, yields on advances is at 9.72% versus 9.23% entering FY '22-'23. NIM stands at 3.66% for the current quarter and at 3.65% for the fiscal year. For Q4 FY '24, our cost-to-income ratio is 51.26%, while it stands at 47.06% for FY '23-'24, aligning with our guidance. Since we are making upfront investments, some elevation in cost-to-income ratio is expected as we await returns. We have also opened our 800th branch in Ayodhya and plan to establish an additional 50 to 75 branches in the current financial year. The digital lending initiative for MSME is nearly complete and should be operational before mid-June. Additionally, the expanded digital lending model will include secured retail products such as housing loans, LAP, etc. We anticipate that these investments and enhanced management will improve visibility on growth moving forward.
On the asset quality side, we plan to continue our trend of reduced slippages and improved recovery through FY '25. ROA has been restored to our long-term average of 1.5% and is expected to stabilize around this level. The net interest margin is expected to remain stable with variations of about 5 to 10 basis points. We anticipate seeing benefits from the digital lending processes in the upcoming quarters. Our focus on cost efficiency means the cost-to-income ratio may remain elevated in the short term before gradual improvement is observed as benefits materialize from digital lending and other initiatives. In summary, we are witnessing a return to stable performance across all parameters, and we expect continued improvement moving forward. I will now open the floor for questions. Over to you all.
Questions and answers
The first question is from Rajesh Mangal Agarwal from Rajesh Mangal & Company.
Sir, what is your projection estimation for this gross NPA, net NPA, and ROA for financial year '24-'25?
We expect approximately INR 700 crores to INR 800 crores slippage for the current financial year. Regarding net NPA, our historical levels suggest it has usually ranged between 1.5% to 1.75%. By year-end, we expect net NPA to be around 1% to 1.25%. Other metrics will depend on technical write-offs, but these figures give a broader picture.
Okay. And what about the ROA, sir?
It should improve from whatever we have achieved so far to the next level.
The next question is from Manish Shah from Investor.
Sir, I wanted to ask about the growth. What kind of growth are you seeing in the current year? Because you mentioned in the last 3 or 4 quarters that you would return to growth of 12% to 15%. Given the expansion in employees and costs, when can we expect that growth?
We hoped for 12% to 15% growth in FY '24-'25, but execution faced headwinds. We are endeavoring to achieve those targets. We are currently aligning resources to establish a solid growth foundation, which may lead to better credit growth soon.
Another question was about other income and fee income. Do you see that going up? And how does your current confidence compare to the last call regarding loan growth?
Yes, the growth figures for the current year indicate improvement, particularly in Q4, which has given us confidence. For Q1, we expect some lull, but substantial growth is anticipated in future quarters.
Comparing to last year, do you expect profit growth of at least 10% to 15% this year?
We are working hard towards that goal.
The next question is from the line of Rohit Jain from Tara Capital Partners.
I have a couple of questions. The first one is on the cost-to-income ratio. It increased from around 48% to 51.2%. You mentioned that it will remain high until investments start yielding returns. Should we assume that this exit rate will hold for FY '25?
You might see moderation in the second half of the year as income from new costs starts to materialize. We foresee an overall cost-to-income ratio between 41% and 47% for FY '25.
So, the first half might be around the exit rate while the second half sees some benefits. Is the overall year expected to be between 47% and 51%?
Yes, that aligns with our expectations.
Your ROA was 1.52%, and you mentioned it should only improve this financial year despite the higher cost-to-income ratio. Is that correct?
That is our focus.
How should we perceive return on equity (ROE) at around 13%? Historically it was higher. Is this the new normal?
The lower ROE is due to the higher capital we are maintaining. Once our growth engine kicks off and ROA improves, ROE should naturally improve as well.
Given the stabilization of credit costs, is FY '25 going to be a year of consolidation rather than growth?
No, we consider FY '23 and FY '24 as consolidation years. FY '25 should be the growth phase as we resolve final aspects.
The next question is from the line of Mona Khetan from Dolat Capital.
Firstly, on digital processes, are all MSME loans today up to INR 5 crores digitally dispersed in about 48 hours?
Yes, and we are aiming to increase this limit to INR 7.5 crores as per RBI standards. The standards are set to ensure efficient processing within 48 hours.
Regarding margins, last year's overall margins were at 3.6%, significantly lower than historical averages. Given that, how do you expect margins to perform?
Historically, our margins have stabilized between 3.4% and 3.7%. The current margin of around 3.65% aligns with our long-term average, and we expect it to remain stable for now.
Is it fair to say that competitive intensity is leading to lower yields overall across cycles?
Yes, we have experienced variations; however, our long-term averages indicate that we are returning to more stable conditions.
What percentage of your gold book is via cash disbursal?
All gold loan transactions are linked to savings accounts; hence, essentially all disbursal is digital, converting instantly to cash if desired.
The next question is from the line of Rohan Mandora from Equirus Securities.
I want to understand the digital initiatives for retail products like home loans, LAP, and auto loans. What segments are you focusing on, and is the 48-hour disbursement timeframe from new lead generation or post-sanction?
Our initial focus will be on existing customers who have taken loans from other institutions. The disbursement timeframe is expected to be achieved post-sanction.
For the SME and MSME segment, are we currently digitally underwriting as well?
Yes, we're at the final stages of implementing API integrations, streamlining our processes significantly.
What is the total quantum of technology-linked expenses planned for FY '25 and FY '26?
Last year, technology implementation added approximately 3% to our cost-to-income ratio. Significant incremental investment is assured in our digital lending processes and technology enhancements.
On growth between Tamil Nadu and outside Tamil Nadu, can you share the loan and deposit growth numbers for FY '24?
The growth in Tamil Nadu is largely on par with overall average growth, as detailed in the presentation.
What is the current quantum of loans linked to EBLR?
Currently, 55% of our loans are linked to EBLR.
The next question is from the line of Sri Karthik Velamakanni from Investec.
Is the increase in employee expenses due to new hires in top management, and is this the new run rate we should expect?
Yes, this reflects the depreciation related to the adjustment of allowances and new hires.
Credit growth has improved sequentially. Last year you refrained from giving guidance; is your hesitation due to last year's unmet targets?
Exactly, we prefer demonstrating our achievements before providing forward guidance.
What is our current LCR ratio or liquidity position?
We sit at approximately 200% as of now, and the details will be published in the forthcoming Pillar 3 disclosures.
The next question is from the line of Palak Shah from Elara Capital.
Deposit growth this quarter was 6% Q-o-Q. What led to this growth, and what are your expectations going forward?
We anticipate things will improve significantly as we move forward, but I cannot commit to specific numbers until we see firm indications.
The next question is from the line of Rakesh Kumar from B&K Securities.
I am impressed by the stable margin and reduced NPA figures. Regarding recovery of technically returned loans, could you provide guidance on recovery pace in the coming year?
Currently, our recovery department does not differentiate between written-off and live accounts. Their targets are holistic and focused on total recovery volumes, aiming to improve beyond last year's recovery total.
What about MCLR progression from recent months?
The divergent trends in MCLR increases can affect margins; prior delays in rate transmissions impacted our margin trajectory compared to regional peers.
The EBLR and MCLR breakup is 55% and 45%, respectively. Correct?
Yes.
The next question is from the line of M.B. Mahesh from Kotak Securities.
Has there been any loan reclassification this quarter?
Yes, changes in definitions have led to some reclassification, particularly concerning MSME loan classifications.
I noticed that you acquired loans in the current quarter totalling about INR 500 million. Is this aggressive acquisition something new, or is it standard operational disclosure?
This could be a result of a couple of deals; it’s business as usual.
Could you summarize the management changes you mentioned earlier?
We've focused on building teams, especially in digital lending and retail. This includes addressing skill gaps and ensuring cultural compatibility in hiring. We have enhanced our senior management and made significant investments in capabilities to secure future growth. Mr. Vijay Anandh's approval for joining the Board is pending from RBI. We are contemplating adding another whole-time director once the decision is made.
The next question is from Rohan Mandora from Equirus Securities.
I want to reconfirm that Mr. Mahesh, heading the Credit department, left the bank shortly after joining.
Yes, he relocated for family reasons very shortly after joining.
Considering the recent government notification to MSMEs requiring payments within 45 days, what impact might this have on credit demand?
We observed mixed trends, with smaller entities reducing utilization while larger industries increased borrowing to meet MSME payment deadlines. Overall, there is a reduction in utilization across the board.
Are recent regulatory changes affecting gold loans impacting us in any way?
No, we maintain strict standards based on multiple audits. We have historically kept losses from purity miscalculations minimal.
What was our AFS reserve as of April 1st under the new valuation guidelines?
The difference in valuation was about INR 20 crores.
The next question is from Rajesh Mangal Agarwal from Rajesh Mangal & Company.
In the presentation, the CASA ratio is 30%, which is lower than the industry average. What’s the reason?
It is our long-term trend, but we have improved by about 7-8% in the last few years. We aim to keep improving it.
Should we aspire to improve this to industry levels?
The aspiration is always present, but substantial growth requires time and sustained effort.
The next question is from Manish Shah, an individual investor.
After addressing non-performing assets, can we anticipate consolidation in technological and digital initiatives this year and growth next year? Or are there already early signs of growth this year?
The consolidation phase primarily concludes in FY '22-'23 and FY '23-'24. We expect to start realizing growth potential sooner than anticipated.
Do you feel your fee and other income will grow faster than previous years due to digital initiatives?
We do not expect a substantial increase in fee income due to digitization, but we have noted significant growth in insurance income, which we expect to continue.
Why was there a significant drop in other income last quarter?
The decline in other income is due to multiple factors, including treasury income setbacks and recovery variances from written-off assets.
In FY '24-'25, have you begun to see the benefits of your digital initiatives?
Indeed, we saw improvements starting in February and March, with our first quarter showing higher inflow sanctions compared to previous years.
The next question is from Jai Mundhra from ICICI Securities.
Can you clarify on the KCC gold loan portfolio? Has it fully run down, and have new products been introduced?
Yes, we have completed the rundown of KCC loans and are introducing loans specifically for both Agri gold and non-Agri gold segments.
Will you need to introduce additional new products to recover lost opportunities?
We are currently refraining from entering that segment until we assess the best approach moving forward.
With the new team now in place, what specific products will this new team focus on, and what milestones can we expect?
After establishing a foundational structure, our immediate focus is on secured retail products. Unsecured retail will follow once we regain market momentum.
We will focus on retail secured products such as home loans, affordable housing loans, and loans against property. Secure introductions will take place in Q2 as we finalize our processes.
When do you anticipate launching these products?
We anticipate starting bookings by September of the current financial year.
Will the product strategy include a mix of branch and non-branch DSA-led sourcing?
Yes, the models will incorporate both branch operations and DSA sourcing strategies.
Lastly, could you provide guidance on operational expenses growth for FY '25?
Our focus is on maintaining a cost-to-income ratio between 47% to 51% in FY '25, reflecting a balanced operational expense framework.
The next question is from Gaurav Jani from Prabhudas Lilladher.
Regarding senior level hires, could you provide a brief overview of their backgrounds?
Most new hires come from new generation banks or foreign banks to enhance expertise in digital and retail operations while ensuring cultural compatibility with our existing team.
How do you plan to ensure that retail products' margins remain robust despite the shift in focus?
We must strategically manage our asset mix and ensure our yields appropriate for the current economic scenario.
You indicated no specific guidance now, but are early double-digit growth expectations possible for FY '25?
Yes, that is indeed the direction we are working towards to facilitate an accelerated growth trajectory.
The next question is from Prashant Kumar from Sunidhi Securities.
As discussed, the cost-to-income ratio is projected to reach 47% to 51% this financial year. What fundamental changes contribute to this business model adjustment?
Our investments in technology and personnel are front-loaded, necessitating an increase in the cost-to-income ratio before anticipated returns can begin to materialize. We must adapt to new treasury treatment regulations impacting our profits and recoveries from technically written-off accounts. We are focused on gradually improving the cost-to-income ratio as returns from our initiatives become evident.
As there are no further questions from the participants. I now hand the conference over to the management for closing comments.
Thank you all for joining this conference call. To sum up, we are witnessing marked improvements across metrics, and the encouraging growth in Q4 should pave the way for enhanced results moving forward. We expect FY '24-'25 to be a much stronger year. Should you have any queries regarding specific numbers, please reach out to Mr. Jayaraman or Mr. Ragu from our team. Thank you for joining us today.
Thank you. On behalf of AMBIT Capital, that concludes this conference. Thank you for joining us. You may now disconnect your lines.