Pink city blues for AU Small Finance Bank

Analysts are now questioning the lender's hiring policy following the high level of exits

AU Small Finance Bank – which commands an expensive valuation due to its robust track-record  - is in a rather peculiar situation. The bank has seen a high level of attrition in the last few months, including some senior-level exits. The reason: Some of the employees are not willing to work at its head office located in Rajasthan's Jaipur,  also known as the Pink City.

On Tuesday, the bank’s stock tanked 13 per cent after it was reported that Sumit Dhir, recently hired as chief audit officer, had resigned. The bank confirmed the development in a late evening communication to the exchanges. “Mr Sumit Dhir has expressed his desire to move back to his hometown Delhi due to changes in his personal circumstances following the second Covid wave,” the bank said. However, it added that Dhir continues to be on its rolls as head of internal audit and efforts are being made by the bank to retain him.

Dhir was hired to replace Chief Audit Officer Nitin Gupta who resigned four months ago. This is the third top-level exit at AU SFB after Chief Risk Officer Alok Gupta resigned in July.

“AU’s attrition levels have been elevated for the past few years (nearly50/40 per cent in FY2020/21) and much above some of the industry peers,” Kotak Securities said in a report.

AU SFB has increased its head count by almost 10,000 in the last two years. Over 23,000 employees joined the bank in the last two years, while more than 13,000 quit. As on March-end 2021, the total number of employees in the bank stood at 22,484, according to the Kotak Securities report.

“Even as the bank continuously adds talent, we have seen some level of churn at the senior management layer across verticals over the past few years. These recent updates are a surprise to the extent that both the persons had joined the bank less than 6 months ago after spending a few years at their previous employers,” the report said.

Analysts are now questioning the hiring policy following the high level of exits.

“Change in personal preferences of an incoming candidate at such an important position in such a short span of time raises questions on hiring policy,” broking firm Emkay Global said in a note following a call with the bank’s management on Wednesday.

“Notably, personal health reasons were cited after the resignation of chief risk officer as well. According to our discussions earlier, management had clarified that it has hired about 100 people in the recent past and some may have left due to the misalignment w.r.t. expectations,” the note said.

AU, however, said there was ‘not a single other resignation’ from the bank’s senior management or board of directors.

At the same time the lender acknowledged ‘challenges’ around the Jaipur location.

“Some challenges remain around Jaipur location which we are addressing by scaling up Mumbai and other regional offices at key cities (like Delhi, Pune, Indore, Chandigarh etc),” the bank said in the exchange filing. AU SFB, initially incorporated as a vehicle finance company in 1996, was transformed into a small finance bank in April 2017 with a presence in 15 states and two Union Territories.

The bank follows a rigorous rotation policy for its senior management. There have been instances where an official was posted in four to five positions in different departments in as many years.

Someone who was in the credit department in 2015, became a risk officer in the following year, then was posted in collections, from there to secured business loans and then in branch banking. Questions sent to AU SFB on the rationale behind the rotation policy, high attrition rate, among others remained unanswered till the time of publishing the story.

AU's MD & CEO Sanjay Agarwal said the bank had "nothing to hide" and there was no "governance issue". He said it was a simple HR issue that the management of the company was trying to resolve in the call with the analyst, news agency PTI reported.

No margin for error

AU SFB demonstrated resilience in performance along with healthy recovery in the June quarter results. The bank was a darling of investors as its share price rose 64 per cent in the last one year. The share of the bank trades at five times its expected (2023) book value, making it one of the most expensive stocks among peers.

Analysts gave a thumbs up to its first quarter performance, and justified the premium valuation it commands. The bank had expressed its ambition to become a universal bank. However, the transformation of a small finance bank into a universal bank is not automatic and requires Reserve Bank of India’s approval.

“We expect the narrative to remain strong for AU with prospects of transforming into a universal bank in the near term,” Nomura said in a report on the bank’s first quarter performance on August 8.

The narrative seems to be changing now.

“In our view, steadily rising asset-quality concerns amid the Covid-induced disruption, the series of resignations in the audit/risk functions and delayed disclosure of these resignations have irked investors. We believe the bank’s rich valuations leave no margin for error,” the Emkay report said.

The bank’s Gross Non-Performing Assets (GNPA), as a percentage of gross advances, rose to 4.31 per cent at the end of Q1FY22, from 1.69 per cent a year ago. Gross NPA ratio at the end of Jan-March quarter was 4.25 per cent.

"Although the GNPAs of AU Finance bank have been stable vis-a-vis the last quarter, it has a higher share of stressed assets at nearly 11 per cent of loan book, if we add NPAs, restructured book and Emergency Credit Line Guarantee Scheme,” said Saday Sinha, founder & CEO, DreamLadder Capital – a wealth management firm.

“Currently, the stock is trading at around 5x P/BV on FY23 estimates and leaves little margin for error. The recent spate of resignations in the audit/risk functions and delayed disclosure of these resignations have shaken the investors’ confidence and it will take some time to regain their confidence,” Sinha said.

On Wednesday, the bank’s stock gained over 3 per cent on the BSE. The shares were trading 0.7 per cent down in morning trades on Thursday.