Reduce AU Small Finance Bank; target of Rs 580: HDFC Securities

HDFC Securities' research report on AU Small Finance Bank

AUBANK marginally beat estimates on the back of lower-than-expected credit costs (30bps annualised), partly offset by a miss on other income. Loan growth maintained sequential momentum (+7.6% QoQ), while deposits were relatively flat. With very limited room for yield reflation (fixed-rate loans at 66% of AUM) and surplus liquidity, AUBANK witnessed a 40bps QoQ compression in NIMs (5.7%) as low-cost CASA dropped 300bps sequentially. AUBANK continues to invest in franchise-building activities, credit cards and digital initiatives, which are likely to drag medium-term profitability before we begin seeing operating leverage benefits accrue in FY25 (as per management guidance). We believe that efficiency gains are likely to be gradual while reflation in margins is contingent on a turn in the rate cycle.

Outlook

We tweak our FY24E/FY25E estimates marginally, factoring in continued moderation in margins and higher opex; maintain REDUCE, with a TP of INR580 (2.7x Mar-25 ABVPS).

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