Buy AU Small Finance Bank; target of Rs 830: Motilal Oswal

Motilal Oswal is bullish on AU Small Finance Bank recommended buy rating on the stock with a target price of Rs 830 in its research report dated September 18, 2024.

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September 19, 2024 / 12:34 IST

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Motilal Oswal's research report on AU Small Finance Bank

AU Small Finance Bank (AUBANK) is well-positioned for strong growth, demonstrating a steady improvement in operating profitability as it capitalizes on the synergies resulting from the merger. A high-yielding loan book following the merger and broader product offerings, especially in the South, will facilitate profitable growth in the coming years. The bank’s recent application for a Universal Bank license is expected to streamline regulatory requirements, improve brand positioning, and foster growth by enhancing customer acquisition and deposit productivity. Although NIM may contract to 5.5-5.7% due to rising costs, improvements in disbursement yields and potential rate cuts are expected to enhance margins. We estimate the operating leverage to improve gradually with a C/I projection of 62% for FY25 and further recovery to 60% by FY27. The bank maintains robust asset quality with stable credit costs. It expects GNPA/ NNPA ratios to remain around 1.9%/0.6% by FY27 and PCR to improve to 70%.

Outlook

We estimate RoA to improve to 1.8% by FY27, aided by ~24% loan growth, resulting in a ~32% CAGR in earnings over FY25-FY27. We reiterate our BUY rating with a revised TP of INR830 (premised on 3.2x FY26E BV).

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