ESAF Small Finance Bank Ltd Q4 FY2024 Concall Summary

Key Takeaways

• Elevated credit cost dominates the quarter: Additional provisions of INR82 crores over regulatory requirements, driven by stress in Kerala and Tamil Nadu, pushed credit cost higher; management expects this to persist for one to two more quarters.
• Growth commitment intact despite headwinds: The bank exceeded its minimum 25% growth target again this quarter and reaffirmed the commitment, even as disbursements slowed slightly due to election-related cash movement restrictions.
• Deposit franchise undergoing a deliberate shift: CASA ratio fell to ~22.6% as customers chased high term deposit rates, while the bank actively reduced bulk deposits by INR300 crores and switched to retail mode, now at 91-92% of the base.
• Geographic diversification is accelerating: Gross advances outside Kerala reached 63.6% of the total book, and the bank entered Andhra Pradesh and Telangana for the first time in its 30-year history, a milestone in its de-risking strategy.
• What to watch next quarter: Whether the elevated credit cost actually begins to moderate after the guided two-quarter window, the pace of CASA ratio recovery, and any further stress signals from the microfinance portfolio in southern states.

Asset Quality & Credit Cost

• Stress concentrated in two states: Kerala and Tamil Nadu drove the deterioration, prompting the bank to stop fresh lending in some areas; restrictions remain in place while collection work continues.
• Provisioning policy amplifies the hit: The board-approved policy requires 25% provisioning on substandard unsecured loans, but the bank steps up quarterly to 40%, 60%, 80%, and 100% as NPAs migrate to the doubtful category, creating a front-loaded provision burden.
• Income reversal compounds the pain: Slippages triggered a 90-day reversal of income, which pulled down both NII and reported yield for the quarter, even as the loan book grew.
• Near-term outlook is cautious: Management expects elevated credit cost to continue for the next two quarters before normalizing to a range of 2.5% to 3%, but declined to give a precise number when pressed.

K. Paul Thomas: "If you recall, the last time when we discussed this, we had said that over two quarters or so, we should be able to bring it back into some kind of shape. So that work is ongoing."

Growth & Diversification

• Loan book momentum holds: The bank exceeded its minimum 25% growth commitment again this quarter, with the target reaffirmed for the forward period.
• Geographic de-risking on track: Gross advances outside Kerala now stand at INR12,503 crores, or 63.6% of the total book; the top five states outside Kerala collectively account for 50% of total advances at INR9,830 crores.
• Historic entry into new states: The bank started lending operations through BCs in Andhra Pradesh and Telangana for the first time in its 30-year history, having previously only maintained liability-side branches there.
• BC expansion tilts north: New BC enrollments are concentrated north of the Vindhyas: Gujarat, Rajasthan, UP, Uttarakhand, West Bengal, Orissa, and Chhattisgarh, aligning with the strategy to reduce southern concentration.
• Microfinance concentration declining: The share of microfinance in the book is on course to fall to about 60% by FY26-27, down from the current ~67%, reducing single-segment risk.
• Election impact was manageable: Collections faced no major challenges during the election period, though disbursements slowed modestly due to cash movement restrictions; management characterized business as usual across India.

Management: "What we have committed is a minimum of 25% and that continues. Even this past quarter we have exceeded that."

Deposit Franchise & Cost of Funds

• CASA ratio under pressure: The ratio declined to about 17-18% intra-quarter and closed the year at approximately 22.6%, as customers shifted to high-yielding term deposits available in the market.
• Cost of funds likely at peak: The cost of funds rose roughly 100 bps year-on-year from repricing of the existing deposit book; with repricing nearly complete and a 25 bps rate cut in the last quarter, management believes this is the peak.
• Bulk deposit reduction executed: Bulk deposits were brought down from approximately INR1,800 crores to INR1,500 crores, with the freed-up funding switched into retail mode; retail now constitutes 91-92% of the deposit base.
• Core deposit franchises remain steady: NR deposits, which make up 25-28% of the deposit book, continue to perform strongly, and senior citizens remain a key constituent; the bank adds 30,000 to 40,000 new customers per month.
• CASA recovery plan in motion: Management stated plans are in place to bring the CASA ratio back up and that the bank is on course, though no timeline was specified.

Margins & Profitability

• NII decline despite book growth: NII fell quarter-on-quarter because cost of funds rose ~100 bps YoY from deposit repricing, and slippages required a 90-day income reversal; yield decline was driven entirely by this reversal, not by any MFI interest rate reduction.
• NIM outlook stable around current levels: NIM is approximately 10%, and management expects no significant change from that level, with only marginal fluctuations going forward.
• NII growth to track loan book: Management guided that NII growth should be more or less in line with loan book growth; if the loan book grows 25%, 20% NII growth is a reasonable assumption.
• Employee costs spiked on multiple fronts: Employee expenses rose 17% QoQ, driven by an INR6 crores actuarial valuation increase, plus branch additions and employee additions during the quarter.
• ROA target held despite headwinds: Management expects to deliver a 1.8% ROA for the full year FY25, even with elevated credit cost persisting in the near term.
• Yield to moderate gradually: As the retail portion of the book catches up, a slight moderation in yield is expected, but management characterized it as not very significant.

Competitive Positioning

• Vintage and loyalty as a moat: The bank operates in most of its microfinance geographies with a vintage of more than 10 years, which management argues builds customer loyalty that newer entrants cannot easily replicate.
• Banking license as a differentiator: Management believes customers trust banks more than pure-play microfinance institutions because a bank can support them through their growth phase with a broader product suite as their businesses scale.
• Off-book business under evaluation: The bank will evaluate doing a large chunk of off-book business going forward, which could alter the balance sheet profile and capital consumption pattern.

Management: "We are pioneers in microfinance loans. And most of the geographies we are operating, we have got a vintage of more than 10 years. So that customer loyalty is still there. So we don't find any concerns, and as a banker, people trust the banks more because they can, as their business grows, the bank will be able to support them in their growth phase, unlike a microfinance institution."

Guidance & Commitments

Key Metrics