Motilal Oswal 's research report on AU Small Finance Bank
AU Small Finance Bank’s (AUBANK) 1QFY21 earnings were strong, led by higher treasury gains (including the Aavas stake sale) and sharp decline in opex. The bank prudently utilized gains to create higher provisions (INR1.4b), thus, taking the total COVID-19 related provisions to INR2.8b. Overdue loans declined to INR11.3b (4.3% of loans) while complete moratorium book decreased to 11% (v/s 25% as at Apr’20). On the business front, while loan growth moderated, margins saw steep decline of ~50bp, impacted by excess liquidity. -While we remain watchful of the trends ahead as customer activation rate is still at 67% (v/s 80% under normal circumstances), we expect collection trends to improve gradually as guided by the management. Also, higher provision buffer (1%/10% of total loans/moratorium book) should provide comfort given the secure nature of the book. Maintain Buy.
We estimate loan growth to remain soft at 14% in FY21 (18% AUM growth), while credit cost should stay elevated at 2.2% in FY21E, as we build in higher slippages. We value the stock at INR850 (4.4x FY22E BV) and maintain Buy.
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