AU Bank's credit card business will break even in FY25: CEO Sanjay Agarwal

Banking will completely shift from brick-and-mortar to online in some 10 years, he says

AU Small Finance Bank is planning to double its credit card by the end of the current financial year, Sanjay Agarwal, managing director and chief executive officer, has said. The bank will break even in the card business in FY25, he told Manojit Saha in an interview.

Here are edited excerpts from the interview.

The bank’s loan book has grown by 26 per cent and deposits by 32 per cent in FY23. What business growth do you see in FY24?

Last year, there was inflation and a high interest rate cycle with 250 bps hike in the repo rate. We had to redesign and re-discuss the entire strategy last year, and there we realised that we need to be focusing on our deposit franchise. We were able to do a decent job by growing our deposit franchise by 32 per cent. Our current and savings account deposit rate was 38 per cent. We managed to control our cost, which was around 5.96 per cent for the full year (and) which is exactly as the previous year.

There was a strong optimism about the credit demand, but there was a rationality around it as we want to build it in a more sustainable way, so our asset growth remained 26 per cent.

I am very happy the way we have done our numbers in spite of so many challenges.

I would say this year things look little better…there is a pause on the interest rate cycle, the credit demand remained strong. I believe we can repeat this kind of numbers this year too. I would say anything around 30 per cent—whether it is deposit or asset—should be there. The challenge can only be one that is how we manage our cost of money.

You have securitised some assets which moderated the loan book growth. What would be the reason?

As you know deposits rates were high last year, in quarter four we were actually pricing our deposits north of 8 per cent. There was an option to do some securitisaton. We being in priority sector assets there is a demand for our assets from many banks. We can lower the cost of money with securitisation and also de-risk the balance sheet.

Other operating expenses went up 59 per cent in FY23. Do you see those expenses staying elevated?

There are a couple of things around it. One there is high inflation so there is impact on HR costs and other related costs. Second is that we are heavily investing in our future assets, in technology. We want to invest in the front end application which is our merchant app etc. we want to do credit card better. I strongly believe that in the next 5-10 years, banking will completely shift from brick-and-mortar to online. So we need to prepare ourselves.

The second part is that we are new in our journey. So we need to build our brick-and-mortar distribution for maybe the next 5-7 years. We are just in 21 states. We need to go to every state, make our presence felt, hire people. There is a gestation period for every business. That is why our cost to income looks high. In a couple of years when our credit card will become profitable, we will start monetising our QR code business…when we will achieve an overall scale, that’s the time when we will see our opex coming down.

Net interest margins were at 6.1 per cent in Q4? Can you hold on to those levels as deposits get re-priced?

Our cost of money has already gone up by 40 bps from last year. You cannot re-price assets so quickly because 64 per cent of our assets are fixed rate. There is intense competition and you cannot price our loan at any price because the customer is also cautious about cost. So there will be pressure on net interest margin this year, maybe around 25-30 bps, but the other pool of income will start coming in. NIM can compress but I think overall return on assets, we will still can manage.

AU has grown credit cards steadily. What are the medium term milestones for the card business?

I am excited about the way the credit card business has been built in the last two years. Visa, Mastercard, NPCI—all of them want to partner with us. Our initial data shows we are on the right path as our average card spend per month is Rs 20,000. 84 per cent of our cards are active. 50 per cent cards used by people who are using it for the first time. We have already got 5 lakh cards in two years. And we are doubling it up by next year. In FY 24-25, we will break even in the card business--that may be the fastest in the industry till now. By touching 10 lakh live cards by this year end – that is another milestone. If we keep up the average spend of Rs 20,000, our credit card will be the acceptable card in the country.

Your term as MD & CEO has been extended by 3 years. What will be your priority in the new term?

I want to thank the regulator for keeping faith in us. The first priority for me is to keep this faith on so that more and more people trust AU Bank.

Tech will be my key focus area. I am not a techie; I am a chartered accountant. But I strongly believe that every Indian will have a data footprint in next 10 years. If you have a data footprint, the product offering of a bank should not be so inconvenient. So we can make all those front end applications which makes the customers life easy, we can understand them better. We can provide a very secured convenient channel to interact with the bank.

So tech will be my foremost and second will be HR. How we are going to motivate people to work with AU to service the customers. Also can we start thinking of an environment for generational banking – forever banking. We are not building this bank for 10, 20, (or) 30 years. Can we build an institution which can outlive us, humans, and we can be proud of this institution for 200-500 years.