Rating Rationale
December 06, 2017 | Mumbai
AU Small Finance Bank Limited
Ratings Reaffirmed
Rating Action
Non Convertible Debentures Aggregating Rs.215 Crore (Reduced from Rs.1070 Crore) CRISIL A+/Positive (Reaffirmed)
Subordinated Debt Bonds Aggregating Rs.125 Crore (Reduced from Rs.145 Crore) CRISIL A+/Positive (Reaffirmed)
Rs.500 Crore Certificate of Deposits  CRISIL A1+ (Reaffirmed) 
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's ratings on the debt instruments of AU Small Finance Bank Limited (AU SFB) continues to reflect above-average asset quality and profitability, along with adequate capitalisation. The 90+ days past due (dpd) remains comfortable at 2.3% as on September 30, 2017. Return on managed assets (RoMA) though declined to 1.8% during the first half of fiscal 2018, mainly on account of higher operating cost due to transition to SFB, remains higher than most of the banking sector peers. The capital position is adequate, with capital adequacy ratio higher than 20%. These strengths are offset by moderate scale of operations and geographical concentration in revenue.
CRISIL had revised its rating outlook on the long-term debt instruments of AU SFB to 'Positive' from 'Stable', while reaffirming the rating at 'CRISIL A+'. CRISIL had also assigned 'CRISIL A1+' rating to the Rs 500 crore certificate of deposit programme of AU SFB. (Refer to CRISIL's rating rationale dated November 13, 2017).
The 'Positive' outlook reflects rapid ramp-up in deposit franchise achieved by the bank in a short period of less than six months after conversion to small finance bank (SFB) on April 19, 2017. AU SFB has raised around Rs 2000 crore of deposits till September 2017, 33% of which is low-cost current account and savings account (CASA) deposits and 50% of deposits are retail in nature. The pace of deposit growth is higher than peers in the SFB segment. It has set up 301 branches and 113 asset centres across 11 states and 1 Union Territory as on September 30, 2017.  The outlook revision also factors in the benefits that will accrue to AU SFB on account of transition to bank from a non-banking financial company (NBFC) - in terms of improved market perception, systemic liquidity support, and lower cost of funds.  The cost of incremental funds raised post commencement of banking operations are low at 6.7%. AU SFB will continue to benefit from its diversified product profile and strong presence in the high-yielding retail asset segments. CRISIL believes AU SFB will maintain its growth momentum over the medium term while at the same time improving the composition of its liability profile by increasing the share of deposits, including CASA and retail deposits.

Key Rating Drivers & Detailed Description
* Above-average asset quality
AU SFB has maintained above-average asset quality over the past few years backed by change in business segment, revamped underwriting practices, proactive risk management systems and processes, and strong focus on portfolio monitoring and collection practices. This is in addition to the existing sound understanding of the operating geography and borrower profile. The one-year lagged 90+ dpd in the vehicle finance segment remained low at 2.8% as on June 30, 2017.  The overall 90+ dpd also remained low at 2.3% as on September 30, 2017. The portfolio in micro, small and medium enterprise (MSME) and small and medium enterprise (SME) segments, which represents 44% of the loan book, remains relatively unseasoned (especially SME segment). The asset quality behaviour under stress conditions for the SME and MSME segments is yet to be fully tested and would be a key monitorable.
* Sound profitability
Earnings profile is healthy mainly on account of a high net interest margin (NIM) and lower credit cost. RoMA has remained above average at 1.8% for the first half of fiscal 2018. As expected, post transition to banking operations, RoMA has declined from 2.7% (adjusted for exceptional income) in fiscal 2017 on account of increase in operating cost and investments in lower-yielding securities to comply with statutory liquidity ratio (SLR) requirements. Intense competition will likely reduce yields over the medium term. However, as the SFB is focusing on raising low-cost deposits, NIMs are expected to remain high over the medium term. It also has more avenues to increase other income on account of increased distribution network and cross sale of banking products to existing customers. However, the SFB's ability to garner the low-cost retail deposits, while limiting the operating cost and credit cost is critical for profitability. 
* Adequate capitalisation
Capitalisation is adequate, supported by an ability to raise capital at regular intervals. Equity capital was raised from established financial institutions and private equity investors, which enhances stakeholder confidence. Tier I capital adequacy ratio also remained comfortable at above 20%. Conversion to an SFB has further enhanced flexibility to raise capital over the medium term. Networth increased to Rs 2,112 crore as on September 30, 2017, from Rs 1,988 crore as on March 31, 2017. 
* Moderate scale of operations
Scale of operations is moderate in relation to banking peers, despite growing at above-industry-average rates. Assets under management (AUM) were Rs 12,134 crore as on September 30, 2017, against Rs 10,734 crore as on March 31, 2017. Though a strong three year compound annual growth rate of around 30% is expected to be maintained over the medium term. However, AU SFB has a strong presence in the retail asset segment with a diversified product profile. Moreover, the banking platform provides opportunities for further diversification in other asset segments such business banking, agricultural loans, working capital, and overdraft facilities. Similarly, though it has a strong track record of operations in Rajasthan, Maharashtra, Madhya Pradesh and Gujarat, its portfolio has remained concentrated mainly in Rajasthan at around 50% of the overall AUM and is expected to reduce gradually with diversification in other states.  
Outlook: Positive

The 'Positive' outlook is driven by the rapid ramp-up in deposit franchise achieved by the bank in a short period of less than six months after conversion to small finance bank (SFB) on April 19, 2017. CRISIL also believes that AU SFB will maintain above-average asset quality and profitability, and adequate capitalisation over the medium term. The ratings may be upgraded if there is a faster ramp-up in deposits over the next few quarters so that these become the major source of funding; the share of retail deposits also significantly increases from present level of 50%. In addition, the SFB achieves its planned growth while maintaining above-average asset quality and profitability. Conversely, the outlook may be revised to 'Stable' if improvement in resource profile, and competitive position is lower than expected or in case of significant deterioration in asset quality and profitability.

About the Bank

AU SFB (formerly Au Financiers (India) Ltd) was incorporated in 1996 as and NBFC, promoted by Mr Sanjay Agarwal. It received final approval from the Reserve Bank of India for conversion to an SFB as on December 22, 2016, and commenced SFB operations as on April 19, 2017. The SFB listed its shares on Bombay Stock Exchange and National Stock Exchange during July 2017. It also received scheduled bank status as on November 01, 2017. It operates in the retail asset-financing segment, primarily in the vehicle financing segment (around 50% of AUM). Over the past few years, it has diversified into MSME (28%), SME (8%) construction finance (5%), and loans to NBFCs (7%). It has an established market position in Rajasthan, and has expanded operations to Maharashtra, Gujarat, and other states over the past few years. As on September 30, 2017, it had opened 301 liability branches and 113 asset centres across 11 states and 1 Union Territory. Over 80% of its branches are in four states Rajasthan, Gujarat, Maharashtra and Madhya Pradesh.
Total income and profit after tax (PAT) were Rs 1,387 Crore (net of exceptional income) and Rs 305 crore (net of exceptional income), respectively, in fiscal 2017, as against Rs 1,015 crore and Rs 212 crore, respectively, in the previous fiscal. In the first half of fiscal 2018, total income (net of exceptional income), and PAT (net of exceptional income) were Rs. 927 crore and Rs. 130 crore, respectively.

Key Financial Indicators
Particulars Unit 2017 2016
Total assets # Rs. Cr. 13,655 8,814
Total income @ Rs. Cr. 1,387 1,015
PAT @ Rs. Cr 305 212
Gross NPA % 1.9 0.9
Overall capital adequacy ratio % 23.0 18.3
Return on assets @ % 2.7 2.8
# includes securitised and off balance sheet assets
@ figure for 2017 are net of exceptional income

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Nature of Instrument Date of Allotment Coupon Rate (%) Maturity Date Rated Instrument Amount (Rs. In Cr) Rating Assigned with Outlook
INE949L07204 Non Convertible Debentures 6-Mar-13 12.20% 6-Mar-18 10 CRISIL A+/Positive
INE949L07279 Non Convertible Debentures 8-Aug-14 11.30% 8-Aug-19 150 CRISIL A+/Positive
INE949L08012 Subordinated Debt Bond 21-Mar-11 15.00% 25-Mar-18 20 CRISIL A+/Positive
INE949L08038 Subordinated Debt Bond 18-Jul-12 12.50% 20-Feb-18 25 CRISIL A+/Positive
INE949L08046 Subordinated Debt Bond 26-Jul-12 13.50% 27-Jun-18 25 CRISIL A+/Positive
INE949L08061 Subordinated Debt Bond 24-Jan-13 12.75% 30-Jul-18 10 CRISIL A+/Positive
INE949L08079 Subordinated Debt Bond 9-Mar-13 12.75% 18-Sep-18 10 CRISIL A+/Positive
INE949L08087 Non Convertible Debentures 25-Mar-13 12.35% 25-Mar-18 55 CRISIL A+/Positive
INE949L08095 Subordinated Debt Bond 8-May-13 13.00% 5-Feb-19 10 CRISIL A+/Positive
INE949L08111 Subordinated Debt Bond 6-Aug-13 12.50% 3-Jul-19 5 CRISIL A+/Positive
INE949L08129 Subordinated Debt Bond 30-Sep-13 12.41% 30-Sep-20 10 CRISIL A+/Positive
INE949L08137 Subordinated Debt Bond 8-Nov-13 13.00% 19-Sep-19 5 CRISIL A+/Positive
INE949L08137 Subordinated Debt Bond 8-Nov-13 13.00% 19-Sep-19 5 CRISIL A+/Positive
NA Certificate of Deposits # NA NA NA 500 CRISIL A1+
#Yet to be issued
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  500  CRISIL A1+  13-11-17  CRISIL A1+    --    --    --  -- 
Commercial Paper  ST    --  13-11-17  Withdrawal    No Rating Change  10-04-15  CRISIL A1+    No Rating Change  CRISIL A1 
Non Convertible Debentures  LT  215  CRISIL A+/Positive  13-11-17  CRISIL A+/Positive  20-12-16  CRISIL A+/Stable  10-04-15  CRISIL A/Positive    No Rating Change  CRISIL A/Stable 
            15-04-16  CRISIL A/Watch Positive           
Subordinated Debt Bond  LT  125  CRISIL A+/Positive  13-11-17  CRISIL A+/Positive  20-12-16  CRISIL A+/Stable  10-04-15  CRISIL A/Positive    No Rating Change  CRISIL A/Stable 
            15-04-16  CRISIL A/Watch Positive           
Fund-based Bank Facilities  LT/ST    --  13-11-17  Withdrawal  15-04-16  CRISIL A/Watch Positive  10-04-15  CRISIL A/Positive  17-10-14  CRISIL A/Stable  CRISIL A/Stable/ CRISIL A1 
            20-12-16  CRISIL A+/Stable           
Non Fund-based Bank Facilities  LT/ST    --  13-11-17  Withdrawal  20-12-16  CRISIL A+/Stable  10-04-15  CRISIL A/Positive  28-03-14  CRISIL A/Stable  CRISIL A1 
            15-04-16  CRISIL A/Watch Positive           
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for rating short term debt

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