MD & CEO’s Message

All for Banking. Banking for All.

‘‘The financial year 2019-20 will be the Golden year in the history of AU Bank - a year full of learnings and hard work. We gained a deeper understanding of the essence of the banking franchise.’’

– SANJAY AGARWAL

DEAR MEMBERS,

Namaskar!

“Time is the wisest of all things that are, for it brings everything to light.” - Thales

Humbling 25 years as a trusted institution. Valuable 3 years as a responsible Bank. And an eventful 2019-20.

Time brought everything to light – the strengths, the weakness, the opportunities, and the threats. I feel, we are often tested not to reveal our weaknesses, but to discover our strengths.

The financial year 2019-20 would be the Golden year in the history of AU Bank - a year full of learnings and hard work. We gained a deeper understanding of the essence of the banking franchise. The year 2020 is yet again a special year as AU turned 25 and I turned 50. It is heartening to share that we are beaming with positivity, energy, and enthusiasm.

The power and responsibilities of the banking platform continue to amaze and inspire us. The euphoria of first year, and the stable operations of second year have led us to an eventful third year. It provided us the right conditions for building a Golden year in silver times. This year, we worked on the market, customer strategy, performance, quality, brand image, communication, digital outlook and trainings to crystalise the foundation for FOREVER. We expanded our Board and strengthened our senior management team. I travelled across AU locations and met various customers and team members. It was a great learning experience and extremely humbling.

The Indian economy underwent a circular downturn in the last financial year with growth further slowing down in the second half and outbreak of novel Coronavirus intensifying in March 2020. The Indian banking industry faced multiple challenges through the year – a slowing macro environment, adverse events related to specific financial institutions which threatened the overall stability of the financial system, fresh sources of corporate stress and the most recent jolt from the COVID-19 pandemic.

Coming to the banking system credit growth trends, we observed that credit growth was more muted in metros and urban areas partly due to the deceleration in corporate credit while semi-urban and rural grew in early double digits. Similarly, even though banking system growth has been anaemic, private banks (including SFBs) continued to gain market share and grow in double digits. Further, the PSU banks’ consolidation may create more opportunities for market share gains by private banks.

The Indian economy has been weighed down by both structural and cyclical factors. The government and the RBI has been trying vigorously to bring the economy back to health by announcing new measures. Most notably, the government has introduced a large corporate tax cut in the hope of reviving investment; and recently it announced a plan to privatise four major public sector undertakings (PSUs). Meanwhile, the RBI has cut interest rates by a cumulative 185 basis points during FY 2019-20, as an effort to revive growth and credit. But lending continues to decelerate and investment remains mired in its slump.

The turbulences in the financial services industry further brought to light that the Indian banking system is one of the most efficient systems by design and by regulation. The RBI governs all the Scheduled Banks in India and is the custodian of their combined deposits worth ` 138 lakh crore. There has not been a single instance in the last 30 years (i.e. post liberalisation and privatisation in 1991) where any RBI governed Scheduled Bank lost any depositor’s money.

Policy response to the challenges mentioned above led to some key measures in banking regulations viz.

a) Reducing risk weights for retail loans (excluding credit card loans) from 125% to 100%.

b) Making it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark.

c) Increasing the deposit insurance amount from ` 1 lakh to ` 5 lakh. Moreover, Yes Bank’s restructuring and the RBI governor’s reassurance to the public on maintenance and security of deposits with private sector banks were other notable initiatives.

Talking of Small Finance Banks (SFBs), they were conceived with the intent of driving financial inclusion for the unbanked and under-banked sections of the economy and in their three years of existence have made their presence felt, and have been growing their market share steadily. The RBI introduced on-tap licensing guidelines for SFBs during FY 2019-20, which is a testimony to the significant untapped opportunities in the informal/semiformal sectors, and efficacy of the SFB delivery mode.

This was a year of a great slowdown, where the economy seemed headed for the intensive care unit. Despite these headwinds, we did the right work and grew the right way. Our team’s energy and execution orientation enabled us to win the environment with a balanced approach. We were growing asset, growing deposits, maintaining asset quality, and managing risk.

YEAR UNDER REVIEW

"Fire is the test of gold, adversity, of strong men."
- Seneca

FY 2019-20 marked the completion of 12 quarters as a Bank. I am pleased to report that during fiscal 2019-20, we reported 46% growth in total income to ` 4,992 crore in fiscal 2019-20 as against ` 3,411 crore in fiscal 2018-19. Our Net Interest Income (NII) rose by 42% to ` 1,909 crore in FY 2019- 20 compared to ` 1,343 crore in the previous financial year. We reported Net Interest Margin (NIM) of 5.4% in FY 2019-20.

Profit After Tax (PAT) for fiscal 2019- 20 was up by 77% to ` 675 crore as against ` 382 crore in 2018-19. For FY 2019-20 Return on Average Assets (ROAA) was 1.8% and Return on Average Equity (ROAE) was 17.9%.

We clocked a growth of 16% in our new loan disbursements resulting in a strong 27% growth in our Assets Under Management (AUM) to ` 30,893 crore as against ` 24,246 crore in March 2019. Alongside this, despite a challenging environment in terms of slowing macro, outbreak of COVID-19 and transition to daily reporting of NPAs, we maintained stable asset quality and our Gross and Net NPAs were 1.7% and 0.8% respectively, clocking a marginal improvement over FY 2018-19. It was well supported by our strong collections and recoveries through the year.

We scaled up our deposits franchise to over a million customer accounts and our total deposits rose 35% in FY 2019-20 closing at ` 26,164 crore. The overall cost of funds marginally improved to 7.7%.

We maintained healthy liquidity throughout last year and our ALM position was also managed well across all buckets. Also, treasury team generated profits of ` 54 crore from the operations. We maintained a strong total capital adequacy of 22% and our Tier 1 capital adequacy ratio was 18.4% as on 31st March 2020.

We endeavour to consistently build wealth for our shareholders and in accordance with our performance we have been declaring dividend each year since becoming a bank. This year we are not declaring dividend as a measure suggested by the RBI. However, the decision will be reviewed based on our financial position for the quarter ended September 2020.

Inclusive growth
Inclusiveness has been in our DNA since our inception and it has been a part of life at AU Bank. Continuing our legacy, this year, AU Bank exceeded the requirements of our key licensing guidelines with ~85% loans to priority sector, ~60% of our loans of value less than ` 25 lakh and ~33% of our branches at present are at rural locations.

I am honoured to share that your Bank got an opportunity to undertake a number of Financial Inclusion initiatives to the remotest corners of the country including patronising and promoting key schemes of the Government of India, opening of several Basic Savings Bank Deposit Accounts, enabling Direct Benefit Transfer (DBT), organising a number of financial literacy camps etc.

We operate in markets where many do not have easy access to finance. When we provide them funding, we become the enablers of their growth. Over the years we have been fulfilling this responsibility with a lot of passion. We have a long and stable track record in lending small ticket, secured, retail loans primarily to the unbanked and underbanked self-employed individuals for purchasing assets to generate income. Our retail asset segment includes three key focus products - Vehicle Loans and Secured Business Loans to MSME and Home Loan.

The automobile sector contributes about 7.5% of India’s GDP and directly and indirectly employs about 3.7 crore people, and continues to present a significant opportunity for financiers. In recent years, the opportunities in vehicle financing business have expanded beyond the traditional core segment of new vehicles to the used vehicle and refinance as well. Despite sluggish growth in the overall automobile sector, our vehicle loan AUM recorded a growth of 27% and stood at ` 12,985 crore comprising 42% of our total AUM, during 2019-20.

India is home to about 6.33 crore MSMEs which are the backbone of the Indian economy accounting for ~30% of nominal GDP. Recent reforms and focused initiatives aim to increase the sector’s contribution to GDP to over 50% as the nation aspires to be a USD 5 trillion economy. AU Bank has emerged as one of the leading lenders to MSMEs since 2009 and is perceived as a trusted solution provider to the sector with strong track record in maintaining asset quality while scaling up. With average ticket size around `10-12 lakh, AU Bank has catered to only 0.12 million units as on date and has a long runway for growth in this segment.

India has a massive shortage of housing (more than 60 million homes) because of its population of more than ~130 crores. The magnitude of demand, trends of rapid urbanisation and nuclearisation, and a plethora of initiatives taken by the government and regulators create significant opportunities for the housing finance segment. Based on our extensive experience in the Housing Loan space, we are poised to take our share of this ample market opportunity.

Some noteworthy events and initiatives of this year were:

Catching the imagination of the customer
We are on a mission to build a Bank which our customers always wanted. By listening to their needs, paying attention to their wants and catching their imagination, we have been taking consistent steps and are continuously focusing on deepening our understanding of our customers. We restructured our product portfolio in line with our customers’ perspective - Personal Banking and Commercial Banking. For customised strategising, we categorised our geographical presence into two groups – Urban and Core locations. Each location has its own diversified market base, customer needs and require their own unique way of delivery. This year we are committed to playing on our strengths and delighting our customers.

Technology Ready
I am happy to inform you that, in a short span of three years, your Bank is standing strong on the payments side with - best-in-class corporate internet banking, being live on all digital payment modes and marquee debit card offerings. We are working on the credit card strategy to complete our bouquet of payment options. This year, we integrated our systems with one of the largest payment gateway aggregators, CCAvenue and Bill Desk, among others. We launched one of our best-in-class offering -
‘AU Royale’ - premier Contactless Debit Card targeting the upper middle-income segment.

This year we took few Industry first technology initiatives like:

Growing the right way
The performance that we achieved this year is a result of phenomenal working and commitment of our team. I would like to share with you that Mr. Uttam Tibrewal, Executive Director, relocated to the Corporate Office, at Mumbai and took the reins of Personal Banking. Mr. Deepak Jain took charge as the Chief Operating Officer and
Mr. Vimal Jain has been appointed as the Chief Financial Officer. Mr. Sai Suryanarayana joined us as the Chief of Human Resource. I could only mention a few developments that took place during the year while AU continued to grow in its journey last year.

In our journey of growing right and growing strong; we have always chosen to rise above the prejudice and never act on perception. We are fostering a culture of learning and growth; collaboration and building relationships to deliver excellence and challenge the status-quo.

We have been unlocking the power of our people through a culture based on inclusivity, which enables them to grow as goodwill ambassadors of AU Bank. We are growing to be a more inclusive organisation. We made humble beginning with initiatives like branchwise Birthday celebrations, regionwise townhalls etc. We are embracing the diversity in a true sense and will continue to build on it in the years to come.

This year was full of laurels and accolades. I believe we are the outcome of the choices that we make in our journey. Some we are proud of and some we may regret. I would like to tell you that we are happy and satisfied with all the choices we made this year. After hitting a boundary just when we were about to put our bat down, we were taken off-guard by a global pandemic. We demonstrated foresight in whatever we did that day, as per the then prevalent situations (in pre-COVID era). But now the rules of the game have changed!

ALL THAT GLITTERS IS NOT GOLD - LIFE AFTER MARCH 2020
The outbreak of a global pandemic has affected all living beings on the planet. It is up to us how we handle and minimise its impact. I am sorry, but I feel our reaction has not been very appropriate. It is extreme and doom laden. The fibre of the world based on imagination, prosperity, continuity, growth and development is severely hit. The premise of the world we were living in - ‘the one world’ does not exist anymore! The kind of world we wanted to make driven by technology led inclusions or disruptions for human advancement seem meaningless today. The worst hit are the marginalised sections of society which have been further marginalised.

In these times, we are fortunate to have this banking platform. As bankers we find an opportunity to build trust and make the world a better place again. I believe banking will evolve to build bridges for a sustainable world.

We are no longer just risk managers. We are Credible Bankers- the Architects of the economy!

We are not just fund managers. We are Credible Bankers- the Builders of businesses!

We are not just the best talent magnets. We are Credible Bankers- makers of an institution of inclusivity!

We have always focused on growing the right way to build a resilient institution that can withstand the test of time. Being a young bank with no legacy, we bring a fresh approach to the table by leveraging the wisdom of the old and energy of the young. We have reached where we are today by overcoming many challenges.

The way the Government of India quickly rose to the occasion and took proactive initiatives even at initial stages, was unprecedented. Following the outbreak of COVID-19 and the ensuing Central Government lockdown, the RBI left no stones unturned in supporting the economy in the best possible way. To tackle more near-term challenges, several measures such as LTROs (Long Term Repo Operation); and temporary and partial exemption of CRR requirements along with measures for real estate sectors have been implemented.

It is said that “No Winter lasts FOREVER, and no Spring skips its turn.” We all know that our lives have their fair shares of ups and downs. These are the seasons of our lives. It is only natural that we experience periods of growth (spring), plenty (summer), ebb (the fall), and challenge (winter). But the wisdom is in becoming aware that no season can last FOREVER. Once we accept this, we can allow ourselves to make the most of each season. We can appreciate better the good times and try to learn from the bad times.

‘‘In our journey of FOREVER, we had a profound realisation— that a Bank matters beyond the math.’’

In our journey of the last 25 years, we have been through several seasons of growth, plenty, and challenges. Whether it was the financial crisis of 2008, oil crisis of 2014 or demonetisation of 2016; each adversity felt the most adverse during the time when we faced it. However, it is our reaction to the adversity, not adversity itself that determines how our story will progress. Since our inception, we had stayed focused on building the right character of our organisation and have been driven by the guiding principles of prudence, sensibility, and honesty. This is what keeps us sailing through such testing times too.

Often when companies prepare business continuity plans or discuss force majeure, the general sense is that they might never have to enforce these plans as such situations will never arise. However, in our lifetime we are actually witnessing these situations. This is helping us build a whole new perspective on risk management and risk appetite especially in terms of our lending strategies. We are proud of our ability to manage excellent service delivery standards even during the lockdown. Your Bank, an essential service provider, stood strong to serve the nation at this critical time. As the nation followed a lockdown, our 2000+ soldiers were out there serving customers at 350+ branches and keeping their faith in our strong banking system. I personally salute their efforts and appreciate their commitment to their call of duty.

WAY FORWARD - BANKING IS MORE THAN MATH
This year we did the right things and grew confident. We won over the fear (during the uncertain times) and became stronger. In our journey of FOREVER, we had a profound realisation — that a Bank matters beyond the math. We appreciated the value of a banking platform by being part of the essential service. This institution is more than risk and returns. It is the fulcrum of the economy. We also understood the importance of the depositors. The Bank is of the depositors. They always stand with us.

These times reminded us that the pitch does not remain the same all the days. We must understand the behaviour of the pitch to execute our plan. The better we understand, the better we execute.

The understanding starts with getting our priorities right in today’s world of imperfections. It all depends on how well we read the environment and accordingly strategise and align the necessary resources. There must be an absolute understanding of the market segment that we operate in. I think Retail is all about detail - understanding our geographies and catering to its specific requirements; understanding our customers by graduating from KYC (Know Your Customer) to UYC (Understand Your Customer) and understanding what inputs need to be in place to achieve the desired output. And of course, what differentiates most of all is our passion and the patience in pursuit of our purpose.

We aim to combine the trust of a Public Sector Bank and services of a Private Bank. Going forward, we will work towards improving our CD Ratio, driving engagement, building convivence and strengthening our character. We will leverage our brand’s outreach, digital capabilities, local insights, balance sheet strength and pricing power to optimise the risk-return matrix. We shall further increase our focus on inputs rather than output and work with growing impetus on the ‘5P’ approach - Policy, Process, Product, People and Partnership. This year the target achieving approach will take a backseat and we will be driven by quality more than quantity.

The experience of going through a global pandemic taught us important lessons. We will let our learnings and experience guide us to contribute towards a more sustainable world. We shall overcome this difficult time by coming together in intent and action for better world, where everyone has their place. We need challengers who can use their strength to improve others’ life; peacemakers who can bring people together and resolve conflicts; helpers who are altruists with unconditional devotion to service and reformers with a strong sense of right and wrong who can improve the world. The world will learn to become rational and humble again. The greed will go away.

As Mahatma Gandhi had said, “We may stumble and fall but shall rise again.” We will rise again! The way India stood strong during the lockdown; I am sure the same sentiment will be displayed now towards combined efforts of social responsibility to bring the nation back to normalcy. Going forward with strong government will, we look forward to accelerating reforms and policies, paving way for sustainable growth of the economy. Even during the enormous challenges, we face today, I have great faith and hope about the future - because I believe in us, in the power of banking, in the power of people to save the world.

I think the Power of Democracy & Acceptance of Diversity will change our world.

Social commitment
The Corporate Social Responsibility team at AU works on need-based interventions in the domains of livelihood enhancement, financial and digital literacy, and sports for development. Further, I am humbled to inform you that this year your Bank extended support by contributing ` 5 crore for COVID-19 relief. We undertook several measures to support our community by distributing food ration kits and hot cooked meals, providing medical kits to health personnel and other frontline workers.

We launched a special product – COVID Shield to inculcate the habit of saving for uncertain times, took a unique initiative to reach out to all our elderly customers and offered to provide them with any kind of help they needed. I am happy to share that customers were delighted with the gesture AU has shown in the time of crisis. Many of them admitted that we are the only Bank reaching out to them for non-business-related matters.

Board of Directors
AU Bank, led by the Board of Directors, is committed to ensure sound corporate governance practices to always keep your trust intact. I would like to sincerely thank Mr. Mannil Venugopalan, our honourable retiring Chairman, for his peerless leadership during his illustrious tenure at AU Bank. In these 10 years, he has taken AU to the forefront of the financial services industry and build it with a strong foundation. Now the baton has been passed to a new hand.

I am honoured to introduce you to our new Chairman, Mr. Raj Vikash Verma. He has been associated as an Independent Director with the Bank since 2018. Mr. Verma,
ex-Chairman and Managing Director of National Housing Bank (NHB), possesses nearly 40 years of experience in the financial sector, particularly in the field of development finance, regulatory supervision, housing, mortgage finance and real estate sectors. We wish him the very best to lead us through the changing world around us.

Our Board comprises a majority of Independent Directors and I am pleased to share with you all that we have inducted Prof. M S Sriram, Mr. Pushpinder Singh and
Mr. V G Kannan as Independent Directors taking the strength of the Board to 9 members (6 Independent Directors) from 7 members in FY 2018-19.

Prof. M S Sriram is an inclusive finance expert. He is a faculty at IIM- B with a vast experience in financial inclusion, microfinance and brings his deep understanding of the rural economy. Mr. Pushpinder Singh is a Banking Technology expert with 35 years of rich experience at Bank of India. He specialises in the field of technological advancement and IT implementation in the banking sector. Mr. V G Kannan, Ex-MD of SBI, Associate Companies, Ex- Chief of Indian Banking Association is a banking industry veteran with 38+ years of experience in the BFSI sector. We heartily welcome them on Board.

Time and again we have received guidance and support from our Board of Directors, and I would express a sincere thanks to all my present and past Board members for their immense contributions in our journey.

Acknowledgement
We immensely value the power of this platform. It is an honour to build an institution which is the epitome of trust and relationship. We are grateful to the RBI and the Government of India for conceptualising the platform of Small Finance Banks to take banking to the emerging India. We thank the regulators, who provided us the guidance; our customers, who always kept their faith and our investors, who support us.

It has been a privilege for me to steer this young Bank driven by an action-oriented team. I express my humble gratitude to SEBI, MCA, NSE, BSE, IRDAI, UIDAI, CERSAI, credit information companies, depositories, and other regulatory authorities for creating an enabling environment for orderly development and regulation of the financial services sector in India. I am grateful to all our shareholders, bankers, vendors, technology service providers, partners, and Team AU for partnering in our growth and strategies. Lastly, I would like to sincerely thank all the unsung heroes. They have been an integral part of our journey.

In this journey, on behalf of AU Bank, we promise you that:

We are building an inclusive and sustainable institution which can last FOREVER. Look forward to serving your lifecycle requirement with utmost care and sensitivity to build an everlasting relationship with you.

Regards,
SANJAY AGARWAL