Rating Rationale
June 29, 2020 | Mumbai
AU Small Finance Bank Limited
Ratings Reaffirmed
 
Rating Action
Non-Convertible Debentures Aggregating Rs.150 Crore CRISIL AA-/Stable (Reaffirmed)
Subordinated Debt Bonds Aggregating Rs.35 Crore CRISIL AA-/Stable (Reaffirmed)
Rs.500 Crore Tier II Bond CRISIL AA-/Stable (Reaffirmed)
Rs.500 Crore Tier II Bond CRISIL AA-/Stable (Reaffirmed)
Rs.1200 Crore Certificate of Deposits CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on debt instruments of AU Small Finance Bank Limited (AU SFB).
 
The ratings continue to reflect AU SFB's adequate capitalisation, gradual ramp-up in deposit franchise, healthy reported asset quality metrics and adequate profitability. These strengths are offset by moderate, though improving, scale of operations as a bank with geographical concentration in revenue and, high wholesale deposits and relatively low share of CASA in overall liability profile.
 
CRISIL has withdrawn its rating on non-convertible debenture of Rs 150 crore and subordinated debt bond of Rs 15 crore  (see Annexure 'Details of Rating Withdrawn' for details) in line with its withdrawal policy. CRISIL has received independent confirmation that these instruments have been fully redeemed.
 
AU SFB has gradually ramped up its deposit franchise over the course of its banking history which has resulted in a deposit base of Rs 26,164 crore as of March 31, 2020 - registering a growth of 35% over last fiscal and now forming 65% of overall external borrowings (including securitisation and assignments). Commensurate to this growth, the share of retail term deposits + CASA has also increased from 39% as on March 31, 2019 to 43% - a year later. Apart from the bank's focus on building a retail franchise, this rise in retail deposits has also been driven by inclusion of deposits having ticket size of Rs 1-2 crore in the retail bucket. Capitalisation has remained adequate in relation to the bank's scale of operation ' reflected in an absolute networth of Rs 4377 crore and tier I CAR of 18.4% on March 31, 2020. The ratings also factor in AU SFB's healthy asset quality which is evidenced by its reported NPAs remaining consistently below 2.5% over the last many quarters. On March 31, 2020, the bank reported GNPA and NNPA of 1.7% and 0.8%, respectively.
 
For fiscal 2020, the bank has registered an annual growth of 27% in Assets under Management (AUM) which was largely driven by its vintage products in the retail segment like Wheels, SBL, etc. Its AUM base of Rs 30,893 crore on March 31, 2020 - though improving - remains moderate in comparison to that of its other banking peers. More so, 43% of its loan portfolio remains concentrated within Rajasthan and top 4 states (Rajasthan, Gujarat, Madhya Pradesh and Maharashtra) account for 81% of the bank's AUM on March 31, 2020 ' indicating a higher degree of geographical concentration.
 
On the liabilities side, however, AU SFB's reliance on bulk deposits is relatively high at 57.6% when compared to banking peers with higher vintage. However, CRISIL notes that 64% of these bulk deposits are non-callable in nature and hence cannot be called prematurely without regulatory approval. The share of CASA in the overall deposit base (including CDs) has also moderated over the last 4-6 quarters to stand at 14.5% on March 31, 2020 ' which is broadly in the same range as for most other SFBs. The bank's earnings profile has remained adequate over its banking journey - despite marginal compression in net interest margins due to SLR, CRR requirements after converting into a small finance bank.
 
The nationwide lockdown (presently effective till end of June 2020) declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have a near-term impact on disbursements and collections of financial institutions. With the lockdown being in its fifth stage now, there is high likelihood that eventual lifting of restrictions will be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics of companies. Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels. For AU SFB 'overall collection efficiency for the month of April, was 53% and as per the management of the bank, there has been further traction in it over May. Further, the management expects significant improvement in collections for June as well. .
 
Nonetheless, AU SFB continues to benefit from the advantages that accrue to it on account of transition to a bank from a non-banking financial company (NBFC) - in terms of improved market perception, systemic liquidity support, and relatively lower cost of funds driven by its ability to raise public deposits
 
AU SFB's Liquidity Coverage Ratio (LCR) was healthy at 133% as on March 31, 2020 and the management has articulated that the LCR has further increased over the last 2-3 months. As on March 31, 2020, the bank had an excess SLR and other avenues of liquidity - all of which aggregated to Rs 4,900 crore. CRISIL understands that the overall liquidity levels have increased substantially over last 3 months.  
 
On the overall deposits front, CRISIL understands that the retention rate in deposits has remained unaffected over the last 3-6 months despite the moratorium announcement on a large private sector bank in March 2020. However, as per management, the inflow of incremental deposits was impacted momentarily in the aftermath of this event though restored soon after and has continued to build up gradually over the first quarter of fiscal 2021 thus far. In addition to having excess statutory liquidity ratio (SLR), the Bank has tied up refinance limits and has received sanctions in the first quarter of fiscal 2021 as well to manage risk of deposit outflows, if any.

Analytical Approach

CRISIL has assessed the stand-alone credit profile of AU SFB for arriving at the ratings.

Key Rating Drivers & Detailed Description
Strengths:
* Adequate capitalisation
Capitalisation, adequate in relation to the bank's scale of operations, has been supported by steady internal accruals apart from the bank's demonstrated track record to raise need based capital. The bank's networth of Rs 4377 crore on March 31, 2020 was further bolstered by Rs 525 crore of share warrants held by Temasek which got converted in the third quarter of fiscal 2020. On the same date, the overall capital adequacy ratio remained comfortable at 22.0% - of which tier I CAR was 18.4%. As on March 31, 2020 - the Bank held 6.34% stake in Aavas Financiers (erstwhile AU Housing) which can be monetized for additional capital, if need be.
 
* Gradual ramp-up in deposit franchise
Over three years of its banking operations, the bank has garnered deposits of Rs 26,164 crore registering a y-o-y growth of 35%; this constituted 72% of the total external liabilities (excluding off book) on the same date ' marking an improvement from 69% -a year ago. During the course of growth, the deposit mix has also been evolving with higher focus on retail deposits. The aggregate share of CASA and retail term deposits in the total deposit base (including CDs) has increased from 39% on March 31, 2019 to 43% now and is expected to grow further though at a gradual pace. Alongside this growth in deposit base, average cost of funds has been declining as incremental funds being in the form of low cost deposits and refinance from financial institutions. For fiscal 2017, cost of funds was 9.6% which has declined over the years and was at an average 7.8% for fiscal 2019 and 2020. The incremental cost of funds for fiscal 2020 was 7.3%. However, there could have been momentary volatility across quarters - owing to market environment and specific events. The second half of fiscal 2020 witnessed two major events - one in September 2019 pertaining to a co-operative bank and the other in March 2020 when moratorium was imposed on a large private bank - that have had an impact of the deposits inflow for the banking sector. In the aftermath of both, the inflow of incremental deposits had moderated for AU SFB for a short span however, it corrected to its business-as-usual rate soon after.
 
* Healthy reported asset quality metrics
AU SFB has sustained its healthy asset quality metrics over the past few years supported by change in business segment, refurbished 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 GNPA (lagged by 1 year) remained relatively low at 2.0% as on March 31, 2020. In the aftermath of disruptions post Covid-19 outbreak - the bank's collection efficiency had dipped initially with a sizable proportion of the book falling in moratorium. However, as the lockdown is being relaxed in stages and business activity is resuming in a staggered manner, the bank's business is also picking up - both in terms of collections and disbursements. From 53% of collection efficiency for the month of April, the management of the bank expects significant improvement in collections for June. However, the pace at which the bank is able to reinstate and sustain repayment discipline among its borrower groups and attain its pre-covid resolution rate, remains a key monitorable. Consequently the ultimate credit loss arising out of this situation remains to be seen. The bank has made a provision of Rs 138 crore (~5% of SMA 0, 1 and 2 accounts as on March 31, 2020).
 
More so, overall disbursements have grown at about 16% y-o-y driven by a 27% growth in disbursements within retail segments - being partly offset by a negative growth of 16% in the small and mid-corporate (SMC) segment which remains small in absolute terms (16% of AUM). Nonetheless, the SMC book has grown rapidly over the last few years with majority of the portfolio being relatively unseasoned (especially SME segment). The asset quality behaviour, especially for this segment, would be a key monitorable.
 
* Adequate profitability despite costs linked to SFB transition
AU SFB's profitability has remained adequate over the last 3 years as it transitioned to a SFB. As anticipated, after commencement of banking operations, return on average managed assets (RoMA) declined from 2.8% (adjusted for exceptional income) in fiscal 2016 to about 1.5-2.0% for the succeeding fiscals, on account of shrinkage in NIIs and investments in lower-yielding securities in compliance with statutory liquidity ratio (SLR) requirements. As the bank has been able to replace legacy institutional borrowing by low cost deposits - leading to a decline in its overall cost of funds, benefit of it has been passed on to the customers as well by the mode of reduction in yields towards the beginning of its banking operations. It also has more avenues to increase other income on account of increased distribution network, increase in income from PSLC and cross sale of banking products to existing customers. For fiscal 2020, the bank has increased yields across all retail segments to factor in the underlying risks in its borrower segment. However, being partly offset by carrying cost of liquidity, net interest margin has reduced by 10 bps. Other income, excluding one-time gain from sale of stake in Aavas Financiers Ltd, has also remained flat over the year. The bank has made additional provisions of Rs 138 crore in the fourth quarter of fiscal 2020, as a result of which RoMA (adjusted for one time gain) for fiscal 2020 was 1.5% as against 1.3% for the previous fiscal. In the medium term, AU SFB is expected to sustain its interest margins driven by its strong market position in its core territories and product segments which allows it to price in the risks suitably. Operating expenses should also remain at current levels given there are no major plans of expansion in the medium term.  While pre-provisioning profitability is expected to sustain in due course, the ultimate losses arising out of covid-19 and the additional provisioning requirement thereof, will remain a key monitorable.
 
Weaknesses:
* Moderate, though improving scale of operations and geographical concentration in revenue profile
Scale of operations, though improving, remains moderate in relation to banking peers, despite growing at above-industry-average rates. Assets under management (AUM) were Rs 30,893 crore as on March 31, 2020, against Rs 24,246 crore a year ago. The bank has grown at a y-o-y rate of 27% alongside maintaining its strong presence in the retail asset segment with a diversified product profile. As a bank, AU SFB has been diversifying in other asset segments such home loan, agricultural-SME loans, gold loan, consumer durable loan, business banking, working capital, and overdraft facilities; however, these businesses remain relatively unseasoned. As a strategic call, the bank has been curtailing its exposure to NBFCs and Builder LAP over the last few quarters. For builder LAP ' there have been negligible disbursements over the last 11 quarters and subsequently lending to NBFCs has also reduced after September 2018. In terms of AUM mix, 84% of the book is deployed in retail loans with Wheels/ Vehicle forming the largest constituent of it at 42.0% followed by small business loans (SBL) which accounted for 36.5% of the book.
 
Similarly, though it has a strong track record of operations in Rajasthan, Maharashtra, Madhya Pradesh and Gujarat, its portfolio has remained concentrated across these 4 states to the extent of 81% with Rajasthan alone accounting for 43% of the overall AUM . Over the medium term, the diversity across product suit and geographical base is expected to remain unchanged as the bank continues to focus on increasing its penetration in these states and product segments, and does not have plan to grow aggressively over fiscal 2021.
 
* High wholesale deposits and relatively low share of CASA in overall liability profile in comparison to peers
While AU SFB has demonstrated its ability to ramp-up its deposit base in the initial phase of its banking journey and continues to do so gradually, a higher degree of focus has been on improving the granularity of deposit base. About 57.6% of AU SFB's deposits are of ticket size Rs. 2 crore and above. Bulk deposits, as opposed to retail deposits, are inherently rate sensitive and not sticky. However, CRISIL notes that about 64% of AU SFB's bulk term deposits are non-callable in nature. Nevertheless, they pose inherent challenges in managing asset liability mismatches, particularly when liquidity is tight. Consequently, building of a granular deposit profile with a reasonable share of CASA is critical. The share of CASA is lower than banking peers at just 10.4% of total liabilities (deposits + borrowings) and 14.5% of total deposit base (including certificate of deposits) as on March 31, 2020.
 
The second half of fiscal 2020 witnessed two major events - one in September 2019 and the other in March 2020 - that have had an impact of the deposits inflow for the banking sector. In the aftermath of both, the inflow of incremental deposits had moderated for AU SFB for a short span however, it corrected to its business-as-usual rate soon after. With its short banking history of 3 years, CRISIL believes that improving the composition of deposit profile will be a key monitorable for AU SFB over the medium term.
Liquidity Strong

In terms of liquidity position, the bank reported an LCR of 133% as on March 31, 2020 against regulatory requirement of 90%. The management has articulated that the LCR has increased further over the last 2-3 months. As on March 31, 2020, the bank had an excess SLR and other avenues of liquidity - all of which aggregated to Rs 4,900 crore. Bank had mobilized Rs 1,000 crore through refinance from NABARD and SIDBI in the Month of March'20. Subsequently, in April and May, the Bank has availed additional refinance from existing institutions and fresh sanction from NHB. CRISIL understands that the overall liquidity levels have increased substantially over last 3 months.

Outlook: Stable

CRISIL believes that AU SFB will continue to build up its liability franchise at the current pace with key focus on garnering a higher base retail deposits over the medium term. The bank is also expected to maintain healthy asset quality and adequate profitability, and adequate capitalisation.

Rating Sensitivity factors
Upward Factors
* Increase share of CASA and overall deposits as a proportion of total borrowings in line with other mid-size private sector banks
* Scale-up of operations while maintaining asset quality within GNPA level of 3% and profitability with RoMA of more than 1.75% on a steady state basis.
 
Downward Factors
* Prolonged deterioration in asset quality reflected in rise in GNPAs to >4% and weakening of earnings profile or capitalization
* Inability to improve the momentum of traction in CASA and retail deposits
About the Bank

AU SFB (formerly Au Financiers (India) Ltd) was incorporated in 1996 as an NBFC, promoted by Mr Sanjay Agarwal. It commenced SFB operations 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. With its leadership position among the small finance banks, AU SFB operates in the retail asset-financing segment, primarily in the vehicle financing segment (around 42.0% of AUM) followed by lending to MSME and SME (36.5%). Other segments like gold loans, personal loans, overdraft, home loans, lending to NBFCs, lending to real estate group remain small.

AU SFB's liability product offerings include the entire gamut of Current Account, Saving Account, Recurring & Term Deposits, Transaction Banking, bouquet of third party mutual funds and insurance covers.
 
On March 31, 2020, the bank had a branch network of 406 bank branches and 122 Business correspondent Banking Outlets spread across 11 states and 1 union territory.

Key Financial Indicators
Particulars as on end/ for fiscal Unit 2020 2019 2018
Total assets # Rs. Cr. 45,725 33,920 21,543
Total income @ Rs. Cr. 4906 3,411 2,155
PAT @ Rs. Cr 596 382 292
Gross NPA % 1.7 2.0 2.0
Overall capital adequacy ratio % 22.0 19.3 19.3
Tier I Capital % 18.4 16.0 18.4
Return on assets @ % 1.6 1.5 2.0
# includes securitised and off balance sheet assets
@ figure for 2020 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 and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Nature of Instrument Date of Allotment Coupon Rate (%) Maturity Date Amount
(Rs. In Cr)
Complexity Level Rating Assigned
with Outlook
NA Tier II Bonds# NA NA NA 500 Complex CRISIL AA-/Stable
INE949L08418 Tier II Bonds 30-Non-18 10.90% 30-May-25 500 Complex CRISIL AA-/Stable
INE949L08129 Subordinated Debt Bond 30-Sep-13 12.41% 30-Sep-20 10 Complex CRISIL AA-/Stable
INE949L08095 Subordinated Debt Bond 05-Jun-13 13.00% 05-Mar-19 10 Complex CRISIL AA-/Stable
NA Certificate of Deposits NA NA 7-365 days 1200 Simple CRISIL A1+
#Yet to be issued
 
Annexure - Details of Rating Withdrawn
ISIN Nature of Instrument Date of Allotment Coupon Rate (%) Maturity
Date
Amount 
(Rs. In Cr)
Complexity
Level
INE949L08327 Non-Convertible Debentures 08-Aug-14 11.30% 08-Aug-19 150 Simple
INE949L08111 Subordinated Debt Bond 04-Sep-13 12.50% 03-Jul-19 5 Complex
INE949L08137 Subordinated Debt Bond 19-Nov-13 13.00% 19-Sep-19 5 Complex
INE949L08137 Subordinated Debt Bond 08-Nov-13 13.00% 19-Sep-19 5 Complex
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  1200.00  CRISIL A1+      17-06-19  CRISIL A1+  28-11-18  CRISIL A1+  06-12-17  CRISIL A1+  -- 
                30-10-18  CRISIL A1+  13-11-17  CRISIL A1+   
                03-10-18  CRISIL A1+       
                06-06-18  CRISIL A1+       
Commercial Paper  ST    --    --    --    --  13-11-17  Withdrawal  CRISIL A1+ 
Non Convertible Debentures  LT  0.00
29-06-20 
CRISIL AA-/Stable      17-06-19  CRISIL AA-/Stable  28-11-18  CRISIL AA-/Stable  06-12-17  CRISIL A+/Positive  CRISIL A+/Stable 
                30-10-18  CRISIL AA-/Stable  13-11-17  CRISIL A+/Positive   
                03-10-18  CRISIL AA-/Stable       
                06-06-18  CRISIL A+/Positive       
Subordinated Debt Bond  LT  20.00
29-06-20 
CRISIL AA-/Stable      17-06-19  CRISIL AA-/Stable  28-11-18  CRISIL AA-/Stable  06-12-17  CRISIL A+/Positive  CRISIL A+/Stable 
                30-10-18  CRISIL AA-/Stable  13-11-17  CRISIL A+/Positive   
                03-10-18  CRISIL AA-/Stable       
                06-06-18  CRISIL A+/Positive       
Tier II Bond  LT  100.00
29-06-20 
CRISIL AA-/Stable      17-06-19  CRISIL AA-/Stable  28-11-18  CRISIL AA-/Stable    --  -- 
                30-10-18  CRISIL AA-/Stable       
Fund-based Bank Facilities  LT/ST    --    --    --    --  13-11-17  Withdrawal  CRISIL A+/Stable 
Non Fund-based Bank Facilities  LT/ST    --    --    --    --  13-11-17  Withdrawal  CRISIL A+/Stable 
All amounts are in Rs.Cr.
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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