Analyst corner: AUBANK gains from monthly payouts, higher interest rates

AUBANK has been navigating well through the economic slowdown and delivering healthy balance sheet growth (45% y-o-y growth in Q2FY20). After incurring significant expenses to put the building blocks in place as it transitioned into a small finance bank, the earnings momentum is gaining pace.

With the bank appearing set to expand market share in chosen business segments, we visited its regional office and one of its largest branches in Pune to understand the progress that it is making. Separately, we visited a new vehicle dealer for AUBANK to understand the trends in vehicle financing — a segment which has shown growth moderation across lenders. Key takeaways from our visits:

AUBANK has stepped up its focus on the used vehicle segment to (i) combat the slowdown in new vehicles and (ii) capitalise on its long-standing vintage in used vehicle financing, which offers higher risk-adjusted yields and profitability. The bank has been expanding its penetration in the used distribution channel. Nearly half of incremental used vehicle disbursement now comes from non-bank/outside channels (i.e. used outlets of OEMs, semi-organised and small vehicle dealers) compared to ~20% earlier. However, origination of new vehicle loans is completely in-house.

Generally, used vehicle delinquency trend is a tad higher (by 70-80bp) than new wheels; however, the same is partially offset by the lower delinquency levels in refinance (cash on wheels), resulting in similar asset quality for the combined used portfolio as in the new vehicle portfolio. AUBANK gains a competitive advantage by offering monthly interest payouts and higher interest rates in comparison to peers. This facilitates faster customer acquisition and build-up of savings balances. CASA + retail TDs remain the key focus area for the branches. It is also the key metric used to evaluate the staff performance. According to the dealer check at the Maruti Suzuki showroom in Viman Nagar, AXSB, HDFCB, SBI and AUBANK are active in car financing. HDFCB and SBIN together account for 50% of the total cars financed, while AUBANK is also gaining share post liquidity constraints for NBFC vehicle financiers and aided by improved TAT.