AU Small Finance Bank, the country’s largest SFB, has seen a series of resignations in the last few months and worried investors have dumped the stock in the last few days. The COVID-19 pandemic has had an impact on the asset quality of banks as the pandemic hit the economy hard. Resignations of key personnel in the risk and audit departments at AU SFB are bound to raise concerns in this backdrop.
The bank appointed Alok Gupta as the chief risk officer for a period of three years with effect from April 1, 2021, in place of Mayank Markanday, who had changed his role within the bank. However, Alok resigned just four months later in August.
Nitin Gupta, the chief audit officer, tendered his resignation request on March 3. His resignation was eventually accepted effective May 13. Sumit Dhir who was roped in to replace Nitin as the internal audit head has also expressed his desire to quit, although the bank is still in discussions with him.
AU SFB has said that Dhir wants to “move back to his hometown Delhi due to changes in his personal circumstances” following the second wave of COVID19.
These exits in the last few months have clearly worried investors. The stock, which had hit a high of Rs 1,389 only on August 24, plunged nearly 17 per cent to close at Rs 1,155.15 on September 1.
SFBs typically offer loans to small businesses, farmers, micro and small industries. These areas have been hit hard by the pandemic. So, these top-level exits in the risk and internal audit departments have raised worries over the asset quality of AU SFB and whether there are things that investors don’t know yet.
In the quarter ended June 30, AU SFB reported a net profit of Rs 203 crore, compared with Rs 200 crore in the year-ago quarter and Rs 169 crore in March quarter. Its total income was also up 9 per cent year-on-year to Rs 1,538 crore.
Its gross NPAs stood at 4.31 per cent in June compared with 4.25 per cent in March. Also, its net NPAs were at 2.26 per cent, up from 2.18 per cent.
AU SFB’s capital adequacy ratio was at 23.07 per cent and tier-I ratio at 21.6 per cent at the end of June. This is well above the RBI mandate of a capital adequacy ratio of 15 per cent and tier I ratio of 7.5 per cent.
It had deposits of Rs 37,014 crore and advances worth Rs 36,635 crore. The bank said collections had seen a pullback as COVID cases in the second wave reduced, and the collection efficiency and customer activation was now at pre-COVID levels.
The numbers suggest there may be little to worry about on the balance-sheet front. However, the recent resignations would have raised doubts among investors, say analysts.
“Resignations in audit/risk departments do raise some concerns around the transparency/quality of the book as well as risks management practices,” said analysts at Nomura Securities.
Similar views around transparency were expressed by analysts at Emkay Global Financial Services, too. “We believe the resignations in audit/risk functions may raise investor concerns about the sanctity of the books/risk management practices... 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 partially contributed to the resignations,” the Emkay analysts said.
The bank, on its part, has tried to allay fears pointing that there hasn’t been a single other resignation in the top-50 senior management team or the board of directors. It also noted that the senior management (top-50) had an average tenure of 6.5 years with the bank.
Analysts say location issues may be a reason behind some of the attritions at AU SFB, as few key positions are based out of Jaipur. The bank is looking to address that, too. “Some challenges remain around the Jaipur location, which we are addressing by scaling up Mumbai and other regional offices at key cities (like Delhi, Pune, Indore, Chandigarh, etc),” it said.
Looking ahead, analysts say maintaining the asset quality, especially in the wake of the COVID-19 stress will be key, say analysts.
“Amid economic challenges for the industry, AU SFB’s ability to sustain asset quality and manage attrition will be key monitorables,” said analysts at ICICI Securities.
No doubt, the earnings for the July-September quarter, which the company will announce next month will be closely eyed.
also read
- Banks likely to see slower credit growth in 2024-25
- Who is Nadine Ahn? Royal Bank of Canada CFO fired over secret office relationship
- Banks to function this Saturday, Sunday. Details of holidays in April here
- What should you do if banks mis-sell insurance products? PSBs told to protect interest of customers
The Nomura analysts feel AU SFB’s long-term story remains intact; its asset business has been built on strong moats, including, wheels, small business loans and affordable housing, and now the liability profile was also scaling up well.
However, if AU SFB is to become a successful large bank, “team building remains a critical aspect and instability around critical functions like risk does raise a question mark over the bank’s ability to scale up to a large balance sheet size if the instability persists,” they added.
Valuation may be another reason why the stock tumbled in the last few days. “We believe the bank’s rich valuations (4.4 times FY24 estimated adjusted book value, pre-correction) leave no margin for error,” said the Emkay analysts, who have a “hold” rating on the stock.
ICICI Securities and Nomura too, have a “hold” and “neutral” rating on the lender.
After the recent sell-off, AU SFB’s shares closed up 1.4 per cent on Thursday. Investors as much as the bank management may be hoping the worst is behind it for now.
