Reduce AU Small Finance Bank: target of Rs 725: Emkay

Emkay's research report on AU Small Finance Bank

AU SFB reported weak core performance, with margins declining sharply by 40bps QoQ to 5.4%, although higher treasury gains and surprisingly lower non-staff opex, amid bidding for a Universal Banking license led to a ~6% PAT beat, at Rs5.8bn/1.5% RoA. AUM growth moderated to 17.9% YoY/1.7% QoQ, largely due to a sharp decline (23% YoY/7% QoQ) in Unsecured businesses (MFI and Credit Card). This, along with rising stress in the used HCV/SCV segments, MFI and the South-based secured mortgage portfolio, led to a 19bps increase in GNPA to 2.5%, as also credit cost. The bank expects the margin to remain soft in 2Q, albeit to improve thereafter. It has also revised its credit cost guidance for FY26 by 10bps to 1% of average assets due to persistent stress in the MFI portfolio, while refraining from providing FY26 RoA guidance, citing macro and asset quality uncertainties. We trim FY26-27E earnings by 2-3%,

Outlook

While retaining REDUCE and TP of Rs725, given higher valuations (2.6x FY27E ABV) amid a weak core performance and persistent asset quality stress.