Emkay Global Financial's research report on AU Small Finance Bank
AU SFB reported higher-than-expected PAT at Rs3.9bn vs. our estimate of Rs3.6bn, mainly due to stable margins and lower LLP, partly offset by higher opex. Bank utilized contingent provisions to the tune of Rs0.3bn, with asset quality in better control as GNPA ratio improved QoQ to 1.8%. Credit growth remained strong at 38% YoY/7% QoQ, mainly led by strong corporate/SME growth and healthy retail growth. Growth in the wheels portfolio remains relatively moderate amid rising rates, while other retail segments report strong traction. Management has guided to balance growth with margins. Bank awaits guidelines from the RBI for applying for the universal banking license, while term-extension applications for MD & CEO Sanjay Agarwal and WTD Uttam Tibrewal are pending with the RBI. We largely retain our earnings estimates and expect RoA/RoE at 1.7%/15-17% over FY23-25E, as leverage improves.
Outlook
We retain our HOLD rating on the stock, with a TP of Rs650/share, given rich valuations. That said, we believe AU’s maneuvering the rising rate cycle without taking much impact on its otherwise-higher return ratios as well as raising compliance/governance standards will be closely tracked, as it prepares to apply for the Universal Banking Licence. Recent ECL norms too could be cumbersome for the bank, given its lower PCR and relatively-high risk model.
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