Buy AU Small Finance Bank; target of Rs 725: ICICI Securities

Buy

ICICI Securities research report on AU Small Finance Bank

AU SFB’s profitability, post merger in Apr’24, was impacted due to elevated credit cost on the back of higher-thanexpected delinquencies in its credit card (CC)/microfinance (MFI) portfolios and NIM compression. While near-term challenges persist, we believe RoA at 1.5%, as on Dec’24, has bottomed out and shall witness a steady uptick Q1FY26E onwards. Key drivers for RoA expansion would be: 1) normalisation in MFI credit cost to ~3% (9MFY25 credit cost at 5.41%); 2) course correction in CC business to pare credit costs and align with industry average of 6–7%; and 3) a falling rate cycle auguring well for cyclical recovery in NIM (~64% of assets are fixed price). On balance, we expect RoA improving ~30bps to 1.8% by FY27E.

Outlook

With likely improvement in profitability and the recent stock price correction (~15% in past 1–3 months), we upgrade the stock to BUY (Hold earlier) with a revised TP of INR 725 (earlier INR 625), based on ~3x Sep’25E BVPS (earlier: 2.5x). The stock is currently trading at 2x/1.7x FY26E/FY27E BVPS.

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AU Small Finance Bank - 27022025 - isc