Its loan growth has declined from 40 percent range, it has grown at a muted rate of 3 percent QoQ, mainly driven by the retail segment.
Shares of AU Small Finance Bank were locked in 5 percent lower circuit for the second consecutive session on May 5 after Japanese brokerage firm Nomura downgraded its rating to 'neutral' from 'buy' earlier.
The research firm also slashed price target significantly by 53 percent to Rs 500 from Rs 1,065 per share earlier as AU SFB traded at a significant premium to peer small finance banks and banks like ICICI Bank.
The stock was trading at Rs 490.75, down Rs 25.80 or 4.99 percent on the BSE at 10:53 hours. It was down 5 percent in the previous session too, especially after weak quarterly earnings.
"Near-term challenges outweighed long-term opportunity, while the company has few levers in terms of capital raise/stake sale in Aavas," the brokerage said.
AU Small Finance Bank's profit has grown at a muted rate of 3 percent YoY on the back of the strong provision for COVID-19 taken for Rs 151 crore. Net interest income has remained muted at 9 percent QoQ on the back of a slowdown in AUM growth of 3 percent QoQ.
Its loan growth has declined from 40 percent range, it has grown at a muted rate of 3 percent QoQ, mainly driven by the retail segment. The NIM has remained stable on the back of the decline in the incremental cost of funds.
The cost to income ratio stood elevated on the back of higher operating expenses which management has guided to taper down going forward. Gross non-performing assets (NPA) declined by 18 bps to 1.7 percent and net NPA fell by 21 bps to 0.8 percent QoQ during the quarter.
"We remain cautious on the asset quality front on the back of COVID-19 lockdown going ahead. As of April 2020, it has Rs 2,300 crore of the portfolio at stage 2, so we expect credit cost to remain elevated in the FY21," Narnolia Financial Advisors said.
The brokerage has reduced its FY21 estimates by 20 percent majorly on the back of overall slow down in the auto industry and higher provisioning on the back of rising default in the COVID-19 situation. It also decreased the price target to Rs 555 while having a neutral call on the stock.
But while maintaining buy call on the stock with a revised target of Rs 675, Motilal Oswal feels AU Small Finance Bank has reported a steady operating performance, though COVID-19 provisions have dented earnings.
"The bank has reported robust asset quality ratios; however, collection efficiency has declined due to the lockdown. AU SFB disclosed that moratorium has been availed for 25 percent of the loan book. Deposit growth has held strong, enabling the bank to maintain strong surplus liquidity and LCR of 133 percent, among other measures," the brokerage said.
Motilal Oswal estimated loan growth trends to remain soft at 15 percent in FY21 (20 percent AUM growth), while credit cost would increase to 1.7 percent in FY21, as it built in higher slippages, driving an 18/10 percent cut in FY21/FY22 earnings estimates.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.