By Harshal Patkar

India Ratings and Research (Ind-Ra) has undertaken the following rating actions on AU Small Finance Bank Limited’s (AU SFB) non-convertible debentures (NCDs) and bank facilities:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

NCDs*

-

-

-

INR27.65

IND AA-/Stable

Upgraded

Bank facilities

-

-

-

INR3.1 (reduced from INR3.3)

IND AA-/Stable

Upgraded

Subordinate debt*

-

-

-

INR1.5

IND AA-/Stable

Upgraded

Commercial paper

-

-

-

INR2.75 

WD

Withdrawn (paid in full)

Certificates of deposit

-

-

-

INR10.0

IND A1+

Affirmed

* Details given in Annexure

The upgrade reflects AU SFB’s reasonable transition to the small finance bank (SFB) platform, with reasonable traction on retail liability and simultaneous strengthening of product portfolios while containing delinquencies at a comfortable level. The ratings benefit from AU SFB’s policy to maintain leverage at a moderate level (around 7.0x for the medium term) commensurate with its asset side risks,
as well as from an improved access to equity-raising after the listing in July 2017. AU SFB intends to maintain healthy liquidity with matched asset and liability tenors. Ind-Ra derives comfort from AU SFB’s execution capabilities that have been displayed from time to time (e.g. transition to the SFB platform, asset side transitioning and liability accretion), in addition to the quality of the management team.

The ratings, however, are constrained by AU SFB’s regional concentration, unseasoned loan book (last 12 months disbursals/assets under management (AUM) of 66% as of December 2017) and insufficient track record in asset-liability management on the SFB platform.

KEY RATING DRIVERS

Strong Footing in Core Geography: AU SFB transitioned to the SFB platform with a fairly competitive positioning on the asset side. It has a competitive advantage of reach and local knowledge in Rajasthan. AU SFB has one of the largest banking footprints in Rajasthan and is expanding its footprint in 10 states. AU SFB’s ability to increase wallet share in the core geography while cross-selling asset (working capital and personal loan products) and liability products will be a key monitorable.

Comfortable Liquidity Profile: The tenures of AU SFB’s assets and liabilities are fairly matched, with no negative gaps in the up-to-one-year bucket as of December 2017. AU SFB plans to expand its asset tenure, keeping its liability tenure in consideration without running mismatches in the softer buckets. As of December 2017, AU SFB had a statutory liquidity ratio over and above required under the regulation (about 3.0% excess).

Additionally, AU SFB plans to maintain adequate liquidity buffers in the form of banking lines for overnight facilities, lines from developmental financial institutions and excess investments in government securities that can help tide over refinancing challenges in the event of a market disruption and a liquidity shock. It had an INR11.0 billion line from development finance institutions, apart from INR2.4 billion worth of committed bank lines of credit at 9MFYE18. Furthermore, the inclusion of AU SFB in the Second Schedule to the Reserve Bank of India Act, 1934, provides it access to the repurchase agreement window for contingent liquidity requirement and widens the liability generation spectrum.


Funding Profile Gradually Evolving: AU SFB has achieved a reasonable traction in granular liabilities accretion, along with a low-cost current account and savings account ratio of 37% of deposits as of 3QFY18. Moreover, as a percentage of total borrowings (on book), deposits stood at 33.7% in 3QFY18 (2QFY18: 21.0%; 1QFY18: 9.9%). The ability to scale up its granular liability franchise as its non-banking financial company (NBFC) liabilities’ grandfather and replace pre-conversion bank loans and NCDs as they mature with granular deposits without materially affecting its asset liability profile would be critical. This is especially important in light of limited access to bank funding post the transition to the SFB platform.

AU SFB’s funding is fairly diversified, with NCDs, refinance from financial institutions and bank loans accounting for 26%, 18% and 4% of its borrowings (including deposits and off-balance sheet) in 9MFY18, respectively. The company has a sizeable dependence on off-balance sheet funding through bilateral assignments and securitisation. The share of off-balance sheet funding in the overall funding reduced to 22.4% in 9MFY18 (FY17: 36.0%) from over 47.0% in FY14 and is likely to fall further in the medium term.


Comfortable Capitalisation: As an SFB, the company plans to maintain a moderate leverage of around 7.0x in the medium term in line with is asset-side risk profile. It had a tier 1 BASEL II ratio of 20.0% and an equity/AUM ratio of 16.4% in 9MFY18. AU SFB’s equity/AUM ratio looks comfortable for medium-term growth aspirations.

Comfortable Asset Quality: AU SFB’s wheels portfolio, the largest segment within retail assets (47.0% share: 9MFY18), exhibited better-than-industry median NPLs on a 90 days past due basis. Overall, the reported NPLs increased on the SFB platform (on-book GNPA: 3QFY18: 2.8%; 2QFY18: 3.1%; 1QFY18: 3.0%) on account of the transition from 120 days past due to 90 days past due.

The portfolio in the micro, small and medium enterprise (MSME) and small and medium enterprise (SME) segments, which represent 30% and 6% of the loan book, respectively, remains largely unseasoned (especially that in the SME segment). Asset quality for the SME segment has already witnessed pressure. Ind-Ra believes the portfolio behaviour under stress conditions for the SME and MSME segments is yet to be fully tested and would be a key monitorable.

The NPLs in the wholesale portfolio (18% of AUM) marginally increased to 0.5% in 3QFY18 (2QFY18: 0.3%), largely driven by the real estate group segment (5.5% of AUM) owing to the implementation of the goods and services tax and other macroeconomic factors. Portfolio performance in this largely regionally concentrated book (average ticket size INR38 million) would be a key monitorable.


Improvement in Operating Performance Likely from FY19: The transition to the SFB platform impacted AU SFB’s profitability owing to a negative carry on cash reserve ratio, statutory liquidity ratio and operating expense, along with compliance cost. Moreover, return on average assets was 2.3% in 9MFY18. While cost/income ratio remains on the higher side (9MFY18: 53.6%), Ind-Ra expects operating expenditure to peak in FY18 owing to upfront opex and operational synergies (which are likely to kick in with a lag). AU SFB’s ability to keep costs under check through technological innovations (adopting a tech-heavy, customer-centric model against a branch expansion-led model) while expanding its liability footprint will be a key monitorable.

AU SFB’s profitability buffers have remained healthy over the years due to a high return on risk-adjusted returns from the SME, MSME and REG segments. Thus, pre-provision operating profit/credit costs remained steady at 4.3x in 9MFY18 (FY17: 8.1x) from 4.6x in FY15. However, through-the-cycle credit costs in the SME, MSME and REG segments are yet to be established. Hence, buffers could likely dip in the medium term.


RATING SENSITIVITIES

Outlook Revision to Positive: Creating a sizeable sticky granular deposit (especially low-cost retail deposits) base in line with those of established banks and creating a reasonable franchise in the banking space both in terms of assets and liabilities, while maintaining adequate short-term liquidity and robust capital buffers, which, in Ind-Ra’s opinion, increases AU SFB’s long-term tolerance to asset quality deterioration, could result in the Outlook revision to Positive.

Negative:
A significant increase in leverage without a corresponding reduction in the asset-side risk or any significant deterioration in the asset quality and profitability buffers could be negative for the ratings. Large gaps in short-term buckets, and inability to keep the momentum in the liability franchise and generate reasonable risk adjusted returns could also be negative for the ratings.


COMPANY PROFILE

AU SFB is a Rajasthan-based systemically important asset finance NBFC turned SFB. It was incorporated in 1996 by Mr Sanjay Agarwal. AU SFB offers retail loans, including wheels loan, secured business loans to MSME and SME, gold loans, agri-SME and consumer durables loans while the wholesale platform offers NBFC loans, real estate group loans and business banking loans.

AU SFB commenced banking operations on 19 April 2017 and was listed on the Bombay Stock Exchange and the National Stock Exchange on 10 July 2017. As on 31 December 2017, AU SFB had 306 branches, 105 asset centres, 23 offices and 291 ATMs across 11 states and one union territory. Moreover, at 9MFYE18 AU SFB had gross AUM of INR134 billion, total deposits of INR37.2 billion and an employee base of 10,666.


FINANCIAL SUMMARY

Particulars

FY17

FY16

Total assets (INR million)

96,514

62,294

Total equity (INR million)

18,942

9,893

Net profit (INR million)

821.9

211.6

Return on average assets (%)

10.4*

4.14

Equity/assets (%)

19.6

15.9

Tier 1 capital (%)

21.5

13.7

Source: AU SFB, Ind-Ra’s analysis

* Includes an exceptional item of profit on sale of investment in subsidiary/associates


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

7 November 2017

2 March 2017

23 March 2016

Bank facilities

Long-term

INR3.1

IND AA-/Stable

IND A+/Positive

IND A+/Positive

IND A+/Stable

NCDs

Long-term

INR27.65

IND AA-/Stable

IND A+/Positive

IND A+/Positive

IND A+/Stable

Subordinate debt

Long-term

INR1.5

IND AA-/Stable

IND A+/Positive

IND A+/Positive

IND A+/Stable

Commercial paper

Short-term

INR2.75 

WD

IND A1+

IND A1+

IND A1+

Certificates of deposit

Short-term

INR10.0

IND A1+

IND A1+

-

-

ANNEXURE

Instrument

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

NCDs

INE949L07386

9 September 2015

10.50

19 April 2019

INR1.25

IND AA-/Stable

NCDs

INE949L07360

25 August 2015

10.50

16 July 2018

INR0.2

IND AA-/Stable

NCDs

INE949L07378

25 August 2015

10.50

24 August 2018

INR0.25

IND AA-/Stable

NCDs

INE949L08285

21 May 2015

8.95

21 May 2021

INR2

IND AA-/Stable

NCDs

INE949L08293

26 June 2015

8.95

26 June 2020

INR3

IND AA-/Stable

NCDs

INE949L08350

10 May 2016

10.05

29 March 2019

INR0.4

IND AA-/Stable

NCDs

INE949L08368

10 May 2016

10.05

30 September 2019

INR0.45

IND AA-/Stable

NCDs

INE949L08376

10 May 2016

10.05

10 November 2019

INR0.5

IND AA-/Stable

NCDs

INE949L08384

10 May 2016

10.05

30 March 2020

INR0.65

IND AA-/Stable

NCDs

INE949L08335

30 April 2015

10.50

8 March 2018

INR0.5

IND AA-/Stable

NCDs

INE949L08343

19 August 2015

10.50

25 June 2018

INR0.5

IND AA-/Stable

NCDs

INE949L07477

13 June 2016

10.05

13 June 2019

INR0.5

IND AA-/Stable

NCDs

INE949L07485

13 June 2016

10.05

12 June 2020

INR0.5

IND AA-/Stable

NCDs

INE949L07394

22 September 2015

10.25

21 September 2018

INR0.25

IND AA-/Stable

NCDs

INE949L07402

22 September 2015

10.25

20 September 2019

INR0.25

IND AA-/Stable

NCDs

INE949L08277

11 August 2015

10.50

10 August 2018

INR1

IND AA-/Stable

NCDs

INE949L08244

8 May 2015

10.50

26 April 2018

INR0.35

IND AA-/Stable

NCDs

INE949L08251

8 May 2015

10.50

13 June 2018

INR0.35

IND AA-/Stable

NCDs

INE949L08400

31 May 2016

10.05

29 May 2020

INR0.5

IND AA-/Stable

NCDs

INE949L08392

31 May 2016

10.00

31 May 2019

INR0.5

IND AA-/Stable

NCDs

INE949L07493

5 January 2017

8.84

20 December 2021

INR3.35

IND AA-/Stable

NCDs

INE949L08269

23 February 2017

8.75

23 October 2018

INR1.5

IND AA-/Stable

NCDs

INE949L08301

28 February 2017

8.90

30 April 2020

INR0.5

IND AA-/Stable

NCDs

INE949L08319

28 February 2017

8.75

28 January 2019

INR1.5

IND AA-/Stable

NCDs

INE949L08178

15 March 2017

8.84

14 September 2018

INR1

IND AA-/Stable

NCDs

INE949L08186

15 March 2017

8.89

15 February 2019

INR1

IND AA-/Stable

NCDs

INE949L08228

6 April 2017

9.51

6 April 2020

INR2.45

IND AA-/Stable

NCDs

INE949L08236

6 April 2017

9.51

6 April 2021

INR2.45

IND AA-/Stable

Total

 

 

 

 

INR27.65

 



Instrument

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Subordinated debts

INE949L08152

4 November 2015

11.75

4 May 2021

INR0.8

IND AA-/Stable

Subordinated debts

INE949L08145

30 September 2015

12.25

2 April 2021

INR0.7

IND AA-/Stable

Total

 

 

 

 

INR1.5

 


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

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Analyst Names

  • Primary Analyst

    Harshal Patkar

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001722

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121