Lionheart Holdings Q2 FY2024 earnings call

• Financial Results: The bank reported a profit after tax of INR 281 crores in the second quarter of FY '23-'24, up from INR 276 crores in the same period last year. The first half of FY '24 ended with a profit after tax of INR 508 crores. • NPA Situation: The slippage ratio for Q2 FY '24 was 2.06%, nearly reaching pre-COVID levels. Live recoveries exceeded live slippages for the first time in recent times. Net NPA dropped below the INR 1,000 crore mark. • Digital Lending: The soft launch of the digital process for MSME lending below INR 3 crores has commenced. The project with Newgen Software and coordinated by BCG is on track. • RBI Inspection: The RBI inspection for the position as of 31st March 2023 was completed, and there was no requirement for disclosure regarding divergence, asset classification, or provisioning as per the results.

In the second quarter of FY '23-'24, City Union Bank witnessed a credit growth of approximately INR 1,280 crores or 3%. The profit after tax for the second quarter stood at INR 281 crores compared to INR 276 crores in the same period of FY '23. The first half of FY '24 ended with a profit after tax of INR 508 crores. The ROA for the second quarter of FY '23-'24 was 1.69%, contrasting with 1.4% in the first quarter of FY '24 and 1.46% for the whole year FY '23.

• The bank aims to close FY '24 with a 4-digit profit after tax. • ROA is targeted to be around 1.3%. • Cost-to-income ratio is expected to be in the range of 42 to 45%. • NIM is anticipated to be at the current level plus or minus 10 basis points. • Growth is skewed towards the second half, with the digital lending platform expected to boost credit growth.

• Treasury profit opportunities are reduced due to the increasing interest rate scenario. • Regulatory observations, such as the earlier stop of the agri gold loan KCC product, can pose headwinds to growth. • Uncertainty exists regarding the full recovery of growth to pre-COVID levels.

Q: On upgrades, which segments are the upgrades from and when did the accounts slip?

A: Upgrades are across various sectors. The largest upgrade was from a resort amounting to INR 19 crores, where there was an improvement in collections. Another significant upgrade was from a contractor for the Government of Tamil Nadu who received payment post-quarter end. These accounts slipped due to delayed receivables from government and other sectors that got released.

Q: On PCR and credit cost guidance?

A: The focus is on reducing net NPA to the pre-COVID level (1 to 1.5%). The coverage ratio may improve automatically as net NPA reduces. Credit cost guidance is linked to net NPA reduction and recoveries surpassing slippages.

Q: On yield increase and interest reversals?

A: There was an incremental pass-on of rate in the first quarter, and its full effect was seen in the second quarter.

Q: On MSME outlook?

A: MSMEs are surviving with good cash flows, and asset quality issues have largely subsided. However, the investment cycle for capacity expansion has not yet picked up.

Q: On margins, RBI observations on MCLR?

A: The bank has written to RBI regarding the observations and is awaiting the results. There has been some yield transfer due to these observations, and NIM is expected to be ±10 basis points.

Q: On employee cost increase?

A: The annual increment starts from 1st July, which is why there was a Q-o-Q increase in employee cost.

Q: On LCR?

A: The LCR is close to 200% and will be uploaded on the website soon.

Q: On BCG project progress?

A: The soft launch of MSME loans < INR 3 crores is ongoing and is expected to be available to all branches by the second half of November. Other products will follow, and it is expected to be fully operational by the third quarter end.

Q: On LOS implementation impact on growth?

A: There is no major change in the usual growth pattern, but it is expected to improve efficiency and reduce the slippage ratio in the longer run.

Q: On net slippages being negative?

A: The difference in recoveries and slippages is due to timing delays related to COVID, and it is expected to sustain negative net slippages for another couple of years.

Q: On further rate pass-through?

A: No more rate hikes are expected, with maybe at best a 25 basis points increase.