ESAF Small Finance Bank Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Earnings rebound on asset quality cleanup: PAT surged 143% YoY to INR140 crores, driven by NIM expansion to 11% and a sharp GNPA decline from 8.1% to 2.6%, though seasonal stress is building in the 1-30 day bucket.
• Seasonal delinquency spike, not structural: Par-1-day overdue rose to INR711 crores, with 50-60% in the 1-30 day band, attributed to Kerala's monsoon, a fishing ban, and weekly repayment cycles. Management calls it "normal course of business."
• Cost of funds pressure is priced in: A further 15-20 bps hike is expected by year-end, but management insists it will not compress the margin, and microloan yields have already absorbed the increases.
• Growth ambition anchored to history: Management guided to "comfortably over 25%" growth for the next three years, pointing to a consistent track record, with all diversification planned to keep ROA at a minimum 2%.
• What to watch next quarter: Whether the seasonal 1-30 day buildup normalizes by Q3 as promised, the pace of GNPA recovery toward the prior year's level, and any disclosure of slippage data now committed for the investor deck.

Profitability & Margins

• NIM expansion: Net interest margin widened from 9.7% to 11% YoY, supported by NII growth of 36.4% to INR597 crores, as the high-yielding microfinance book repriced faster than the rising cost of funds.
• Return ratios doubled: ROA reached 2.6% and ROE nearly doubled to 29.4%, reflecting the operating leverage from a 28% advance growth on a cleaned-up balance sheet.
• Cost of funds trajectory: The bank has already absorbed the bulk of the rate hike cycle; an additional 15-20 bps increase to 7.2-7.3% is expected by year-end but will not dent the margin, as microloan yields at 22-26% have already factored this in and will not rise further.
• Other expenses jump is structural: The sharp rise in other expenses reflects higher BC collection costs, branch expansion, and employee additions, not a one-off event.

K. Paul Thomas: "Even though nature is unsecured, it is being, given for, not for consumption purpose. It is being used for productive purposes. So, and, we have seen, we are in this space for the last 27 years. We are, we have been seeing this. So, on a risk basis, that is, it's only a perception."

Asset Quality: The Seasonal Stress Debate

• Headline improvement masks quarterly blip: GNPA fell sharply YoY from 8.1% to 2.6% and Net NPA from 4.3% to 1.2%, but GNPA rose sequentially from 1.65% to 2.64%, driven entirely by the Kerala book.
• The Kerala concentration risk: With 42-43% of the book in Kerala, the portfolio is highly sensitive to local events. A 45-day government fishing ban from late June to September, combined with monsoons, disrupts cash flows for coastal and agricultural borrowers who repay weekly.
• Delinquency buildup mechanics: The INR711 crores par-1-day overdue (vs INR595 crores a year ago) is concentrated 50-60% in the 1-30 day bucket. Management states some accounts will stick to NPA and be recovered over time, which is the past trend.
• Credit cost outlook: Despite annualized slippages of ~5%, provisions fell QoQ because the prior quarter included a write-off. Full-year credit cost is estimated at ~2%, with Q3 and Q4 expected to moderate from the Q2 seasonal peak.
• Prior cleanup via ARC sale: The decline in borrower count in FY23 (microfinance ~10%, MSME ~50%) was due to a sale of INR1,075 crores in assets to an ARC, covering ~5.5 lakh accounts already fully provided for during COVID, so no further P&L pain.

Hari Velloor: "So, generally, what we see is that during the second quarter, there is a bit of a, you know, what do you say, movement in terms of higher building up of 1 to 30 days. And the buildup generally is at least 50% to 60% of that buildup is in the 1 to 30 days."

Growth & Portfolio Composition

• Advances and deposits in lockstep: Gross advances grew 28% YoY to INR15,123 crores on disbursements up 46% YoY to INR3,345 crores, while deposits grew 29% YoY to INR17,416 crores, with retail deposits up 16% to INR15,485 crores. Advances under management rose 37% YoY to INR17,490 crores.
• Unsecured book is the engine: At 73% of the book, the unsecured portfolio is overwhelmingly microfinance for productive purposes, not consumption. Management argues the risk perception is misplaced given a 27-year track record in the segment.
• Yield ceiling on secured products: Gold loan yields at 13.3-13.4% face competitive pressure from nationalized banks and have no room to rise. Mobility loans at 16-17% and other retail yields should hold at current levels.
• Diversification guardrail: All asset diversification is planned to deliver a minimum ROA of 2%, with new asset classes carrying similar or better yields than the current mix, so no major NIM compression is foreseen.
• Geographic and customer footprint: The bank serves over 0.75 crore customers, majority women, across 21 states and 2 union territories, with 61% of gross advances to unbanked or underbanked rural and semi-urban areas and 72% of banking outlets in those regions.

Hari Velloor: "I can only point to what we have done in the previous years. And in the previous years, we've been comfortably about 25% on a steady basis. So I can say that, that will be what we will be doing also. And that's what we propose to do. Let me put it that way. That is the kind of growth we propose to do, in the coming three years. So it will be comfortably over 25%."

Digital & Operational Investments

• Tech stack build-out: The bank has rolled out cashless disbursement, a digitized central credit processing unit, a 24x7 multilingual call centre, tablet-based account opening and loan underwriting, and e-sign for micro loan disbursements, all aimed at reducing turnaround time and operational risk.
• Investment posture: Management committed to continued technology investment, geographic expansion in chosen territories, and maintaining a strong financial position, signaling that the opex run-rate will stay elevated.
• Disclosure upgrades: In response to analyst requests, management agreed to disclose the 1-90 day overdue number quarterly and to consider including slippage data in the investor deck from Q3 FY24 onward.

Guidance & Commitments

Key Metrics