Senior-level exits haunt AU Small Finance Bank despite management assurances

It’s not just top level exits.

There are concerns about rising stress on its loan book because of money borrowed by mid-sized companies. In a conference call with media on September 1, the bank’s management said the senior-level resignations were for personal reasons and the top is intact. It also asserted that the bank’s asset quality had been improving in recent months.

But, why back-to-back resignations?

Those who resigned cited personal reasons. But, three senior-level exits in a short span of time is not normal in any company. This has spooked investors and raised many questions: Is there a fundamental problem with the loan book? Are the back-to-back exits linked to its financials that aren’t known to the public yet?

Notably, analysts Moneycontrol spoke to do not sense major trouble in the firm’s financials, particularly its asset quality at this stage. Capital situation isn’t worrying either. But they do not rule out potential stress on the books if Covid crisis stays long. More importantly, the firm needs to be more transparent in communications and need to arrest the talent exodus, they said.

“We believe the resignations in audit/risk functions may raise investor concerns about the sanctity of the books/ risk management practices. However, management has tried to allay such concerns and indicated that there were no red flags by the RBI in its recently completed audit,” said Emkay analysts in a note on September 1.

A similar view was expressed by Jyoti Roy of Angel Broking. “It could be a coincidence but the resignations have raised concerns among investors. The pressure may continue for some time. More clarity is needed on people movement,” Roy said.

Earlier, the bank  clarified in a stock exchange filing that internal audit head Sumit Dhir’s resignation was due to personal reasons and there are no other senior level resignations.

AU Small Finance Bank said it "categorically want to confirm that there is not a single other resignation in the top-50 senior management team or the Board of Directors."

“The senior management team (top-50) has an average vintage of ~6.5 years with AU and remains very excited around our journey to create a leading banking franchise. Some challenges remain around the Jaipur location which we are addressing by scaling up Mumbai and other regional offices at key cities,” the bank said.

More transparency called for

Yet, there are calls for more transparency. “Our external checks suggest that possibly aggressive management style, and more so in the transition to a universal bank call for stricter risk management and compliance practices, could have partly contributed to the resignations,” said Emkay analysts.

That said, the bank's management needs to come out clean and explain the back-to-back resignations as a damage control measure, they said. “It also needs to be more transparent and should make timely disclosures to avoid unpleasant surprises,” they said.

How big is the worry on NPAs?

The asset quality trend of AU Small Finance is being closely watched by the analysts. While some think there are no immediate concerns, there is no agreement on this issue.

“The Gross NPA was stable sequentially (quarter on quarter) at around 4.3 percent. There is an increase in restructured loans but if you look at competition, these numbers are in line with the industry,” said Roy of Angel.

At the end of June, 2021, AU SFB’s asset quality still remains better compared with some of its competitors in the SME lending space such as RBL Bank (5 percent GNPAs in Q1) and IDFC First Bank (4.61 percent)

Amid senior level exits, AU Small Finance Bank on 1 September reassured investors that the bank continues to do well in terms of business. The asset quality and business continuation have improved in July and August, the bank’s management said in a conference call on 1 September.

But, not everyone agrees.

“The high growth they saw in the past will have bearing now on asset quality,” said a leading analyst at a Mumbai-based brokerage firm. “SME lending is quite tricky,” the analyst said, requesting anonymity.

The numbers

According to AU Small Finance Bank investor presentation, the gross NPA reduced sequentially by Rs 7 crore to Rs 1,496 crore and GNPA ratio remained flat QoQ at 4.3 percent of gross advances at the end of June. Restructured loans stood at Rs 1,265 crore or 3.6 percent of gross advances. Of this, wheels and small business loans constitute around 91 percent of the total chunk.

As the bank said in the management call, collection efficiency has improved in recent months but has fallen compared to the previous quarter to 101 percent in Q1 of FY22 and from 107 percent in Q4 FY21. But in June, collection efficiency stood at 114 percent compared with 94 percent in May and 95 percent in April.

Going ahead, the bank faces two challenges: Clearing the air on top management exits and keeping a check on asset quality. “Regaining investor confidence will take a while. Markets won’t buy the clarifications so fast,” said the second analyst.

Clearly, small Finance Banks are hit harder by the Covid as they have middle- and low-income borrowers. Although not comparable to AU SFB, Ujjivan Small Finance Bank also has its share of woes on the asset quality front. At the end of June, 2021, the bank's overall recognised stress pool stands at 15.6 percent of the loan book (including GNPA of 9.8 percent/restructured loans of 5.8 percent) and the portfolio-at-risk has swelled to 30 percent.

Ujjivan and AU have different borrower segments. Wheels and MSME loans constitute a major chunk of AU’s book while Ujjivan is mainly into microloans. According to Ujjivan SFB’s June quarter investor presentation, microbanking constitutes 68 percent of the gross advances. This portfolio grew 14 percent on a year-on-year basis.

But, COVID-19 hasn’t spared anyone. There are fresh woes for both borrower segments. Despite the busy vaccination drive, tough days are likely to last for a while.