- AU Small Finance Bank (AUBANK) – Q4 FY25 Update in Simple Words
- AU Small Finance Bank: Overview of the Economy
- Financial and Operational Performance Of AUBANK
- Deposit Base and Branch Updates – AUBANK
- Loan Portfolio Breakdown – AUBANK
- Asset Quality and Loan Defaults – AUBANK
- Net Interest Margins (NIMs) and Profit Outlook
- Strategy and Business Model – AUBANK
- Growth and Future Plans
- What the Management Said – AUBANK
- Analyst Questions – What They Asked and What AU Bank Said
- Key Developments to Know
- Possible Risks to Watch
- Final Thoughts
AU Small Finance Bank (AUBANK) – Q4 FY25 Update in Simple Words
AU Small Finance Bank: Overview of the Economy
The financial year FY25 was not easy. High interest rates, inflation, and tighter rules made things challenging. Getting deposits became harder, and many banks faced more competition. India’s economy grew by about 6.4%, slower than before. The banking sector saw deposit growth of 10.1% and loan growth of 10.8%, which was also lower than FY24.
Financial and Operational Performance Of AUBANK
Deposits Grew Strongly:
AU Small Finance Bank increased its deposits by 27% year-on-year to ₹1.24 lakh crore. If we remove the higher-cost deposits from Fincare (about ₹4,000 crore), the actual growth was over 30%.
Loans Also Increased:
Loan book grew by 20% to ₹1.15 lakh crore, which is nearly double the industry growth. Unsecured loans were reduced by 18%, showing a shift toward safer lending.
Profitability:
- Return on Assets (ROA) was 1.5% even after high credit costs and extra provisions of ₹150 crore.
Cost Efficiency Improved:
The cost-to-income ratio dropped to 57% in FY25 from 64% the previous year. This happened due to better control on expenses, fewer credit cards issued, and benefits from the Fincare merger.
Deposit Base and Branch Updates – AUBANK
CASA Ratio and Liquidity:
CASA (Current and Savings Account) ratio was under 30%, which is common across banks. AU Bank is focusing on building more stable and long-term deposits.
Interest Rate Changes:
After the RBI cut rates, AU Bank reduced interest rates on savings (now 7%) and term deposits (now 7.75%) by 25 basis points. The bank is cautious about cutting rates further.
More Profitable Branches:
By Q4 FY25, 49% of the bank’s branches (as of Dec 2023) were making profits. This is up from just 25% a year ago.
Branch Expansion Plans:
With Fincare’s network now added, AU Bank has better reach, especially in South India. They plan to open 70–80 new branches in FY26, mainly in bigger cities. Also, 75 existing asset-focused centers will start accepting deposits.
Loan Portfolio Breakdown – AUBANK
Secured Loans (87% of Total Loans):
- Most of AU Bank’s loans are secured, meaning they are backed by assets like vehicles, houses, or gold.
- Retail secured loans (wheels, mortgages, gold) grew by 21%. The bank has been lending in rural and semi-urban areas for over 20 years and has a strong presence there.
- Commercial banking loans went up by 32% and now bring in around ₹12,000 crore in deposits. This part of the business is moving to Mumbai for better coordination.
Unsecured Loans (Now Smaller):
- Unsecured loans dropped by 18%. Microfinance (MFI) fell 17%, and credit cards dropped 19%.
- MFI Loans: Collection rates improved to 99.2% in March. The bank expects things to get better in FY26. About 36% of the MFI book is covered by government guarantee (CGFMU), and the aim is to raise it above 75%.
- Credit Cards: AU Bank is being more selective. It cut down monthly card issues from 40–45k to 10k. Monthly spending on cards is down from ₹2,000 crore to ₹1,000 crore. The focus is now on existing customers. Breakeven expected by FY27.
Asset Quality and Loan Defaults – AUBANK
Extra Provisions:
AU Bank made ₹150 crore in extra provisions in Q4, mostly for unsecured loans. Now, coverage on unsecured loans is about 100%.
Credit Cost Outlook:
- FY25 credit cost was 1.3% of average assets.
- For FY26, the bank expects it to be between 0.75% and 0.85%, though early FY26 might still see higher costs.
- Credit card loan defaults were at 11% in FY25, and MFI at 7.75%. These are expected to drop to 6-7% and 3-3.5%, respectively, in FY26.
Risk Control:
With more loans under CGFMU protection, the risk of big losses in microfinance is expected to go down.
Net Interest Margins (NIMs) and Profit Outlook
Margins Slightly Down:
NIM for Q4 was 5.79%, a small drop from 5.85% in Q3. The fall is due to fewer unsecured loans and slower impact of lower rates.
When Will Lower Rates Help?
AU Bank cut savings and deposit rates by 25 bps in April. The full benefit should show up in Q3 or Q4 of FY26.
Margin View:
The bank expects pressure on NIMs to continue in FY26. Profitability will depend more on controlling loan losses.
Strategy and Business Model – AUBANK
Universal Bank Application:
AU Small Finance Bank applied for a universal banking license in September 2024. They expect a decision in 2025.
Business Setup:
Most functions (except credit cards) now report to a top executive. Commercial and microfinance teams are moving to Mumbai. Jaipur will handle back-end operations.
Digital Push:
The bank is working on better digital tools, like Account Aggregator and DigiLocker. They are also using AI to automate tasks and boost cross-selling.
New Products:
They recently launched:
- AD-1 for foreign remittance
- Wealth management and insurance distribution
Gold Loans:
With support from the Fincare team and positive RBI policies, AU Bank plans to grow its gold loan segment.
Growth and Future Plans
Growth Target:
AU Bank aims to grow 2 to 2.5 times faster than India’s GDP over the medium term.
ROA Target:
They are aiming for a stable 1.8% ROA. FY26 should show better results as loan losses go down.
Cost-to-Income Ratio:
The ratio was 57% in FY25. It may rise slightly but will stay below 60% as the bank invests in tech and expansion.
Loan Limits:
Unsecured loans will stay below 15% of total loans. MFI loans will be under 10% (currently around 6%).
PSL Compliance:
The bank fully met priority sector lending rules in FY25. Half of the Small and Marginal Farmer lending target was met through MFI loans.
What the Management Said – AUBANK
Clear and Honest Approach:
AU Bank leadership admitted FY25 was tough. They made full provisions and did not try to hide bad loans.
Cautious but Positive:
The management believes the macro situation is slowly improving. They feel the RBI and government are now supporting growth.
Risk Management:
The bank is keeping enough liquidity and is following RBI rules closely. They say future costs will rise only where needed.
Analyst Questions – What They Asked and What AU Bank Said
- NIMs: Margins will stay under pressure in early FY26, but should recover later.
- Credit Costs: Higher in early FY26, but will improve as more loans are backed by CGFMU.
- Growth Post-License: No restrictions after becoming a universal bank. Growth will depend on market conditions.
- MFI Strategy: Growth will be slow and careful. Risk protection is a top priority.
- Credit Cards: Losses expected to reduce. Bank plans to reach breakeven by FY27.
- Home Loans from Fincare: Some loan defaults, but overall performance is strong. Focus is on affordable housing.
- Microfinance Lending Style: No major changes for now. AU Bank will continue with group-based loans (JLG model).
Key Developments to Know
- Fincare Merger Benefits: Helped reduce costs, improved reach, and boosted the gold loan segment.
- Tech Investments: AU Bank is building stronger digital tools and using automation for faster service.
- Loan Guarantees: Using CGFMU to reduce microfinance loan risks and meet regulatory requirements.
Possible Risks to Watch
- Margins Might Shrink: Due to fewer unsecured loans and slower deposit rate cuts.
- Unsecured Loan Risks: Still some pressure in credit cards and MFI in early FY26.
- CASA Growth: Still a work in progress; the bank isn’t raising rates aggressively to pull in new accounts.
- Macro Conditions: Ongoing uncertainty in global and local economies may affect growth.
Final Thoughts
AU Small Finance Bank (AUBANK) handled a tough year with strong deposit growth, controlled expenses, and smart lending. It is slowly becoming a more mature bank. The focus is on safe growth, improving its deposit base, and building digital capabilities.
Looking ahead, AU Bank is hopeful. They expect better profits in the second half of FY26 as credit costs drop and rate cuts take full effect. The decision on their universal bank license and new digital systems will be important steps in their journey.
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