SFBs to see rise in NII in Q3 on back of healthy loan growth, lower cost of funds

By Piyush Shukla

Small finance banks (SFBs) like AU Small Finance Bank, Equitas, Ujjivan and Suryoday are likely to report a rise in their net interest income (NII) — difference between interest earned and expended — in the quarter ended December (Q3) on the back of healthy loan growth and lower cost of funds.

AU SFB, in a business update on January 4, reported a strong 33% year-on-year rise in its gross advances for Q3 at Rs 40,723 crore. The lender’s average cost of funds for the reporting quarter declined to 5.9% from 6.7% in the year-ago period. The bank’s incremental cost of funds also reduced to 5.3% from 5.8% a year ago.

“Strong AUM (assets under management) growth coupled with 20 bps QoQ (quarter-on-quarter) decline in cost of funds suggests that NII growth would continue to remain robust. NII growth was 4% QoQ in Q2FY22 and we expect NII growth to improve further to 7% QoQ in Q3FY22 (October-December),” brokerage ICICI Securities said in a pre-earnings report. For the quarter ended September, AU SFB’s NII stood at Rs 753 crore, up 34% compared to previous year.

The brokerage said steady incremental cost of funds at 5.3% suggests that incremental deposits are not coming at high cost. The only monitorable will be when and how much cost of fund benefit AU SFB will derive from improving deposit profile from current levels. As per its provisional figures for Q3, AU SFB’s total deposits rose 49% on year to Rs 44,278 crore as of December-end. The lender’s low-cost current account and savings account (CASA) ratio improved sharply to 39% as on December 31 from 22% last year.

In a business update on Thursday, Equitas SFB also reported a 13% on-year rise in its gross advances at Rs 19,642 crore. The lender’s deposit base grew at a similar pace of 13% on a yearly basis to Rs 17,884 crore, of which CASA deposits stood at Rs 9,085 crore, up over twofold since last year.

“The demand for loans from the informal sector borrowers continues to remain very strong. During the third quarter, all the accounts restructured during the year had their first or subsequent instalments falling due. Against this backdrop, collections continue to remain healthy. The recent surge in [Covid-19] infections is something we are closely tracking and hope it does not affect the livelihood of our borrowers,” said PN Vasudevan, managing director and chief executive officer of Equitas SFB.

Brokerage Kotak Institutional Equities said it expects Equitas to report modest yearly loan growth of 14% as collections remain primary focus. ICICI Securities pegs Equitas SFB’s NII to be driven by higher AUM growth and stable margins.

For the quarter ended December, both Ujjivan SFB and Suryoday SFB reported a rise of over 20% in their gross advances. Ujjivan SFB’s gross advances stood at 16,600 crore, up 22% on year and 15% on quarter, while Suryoday SFB’s total loans stood at4,966 crore, higher 27% on a yearly basis and 11% on quarter.

“Lower asset yield [of Ujjivan SFB] due to preference towards secured assets would be partially offset by improving cost of funds (fell 110 bps YoY). Overall, we expect margins to remain flat QoQ and NII to largely mirror AUM growth of 5% QoQ,” ICICI Securities said.