Reduce AU Small Finance Bank; target of Rs 625: Emkay Global Financial

Emkay Global Financial recommended reduce rating on AU Small Finance Bank with a target price of Rs 625 in its research report dated January 28, 2024.

Broker Research

January 31, 2024 / 12:14 IST

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26 Aug, 2025 12:21

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Emkay Global Financial's research report on AU Small Finance Bank

Despite stable NIMs due to increased interest income on securitization and higher fees including cards, AU SFB reported 14% miss on earnings with PAT at Rs3.8bn (Emkay est.: Rs4.4bn) as provisions accelerated to Rs1.6bn due to rising stress in its VF and now even seasoning card portfolio. Fresh slippages were elevated at 2.9% of loans (Rs4bn) due to which GNPA ratio jumped 7bps QoQ to 2% for the third quarter in a row, indicating rising stress. The bank expects credit card book to break-even in FY25, but we believe rising asset-quality stress in cards for seasoned players like SBIC, RBL and so on indicates that stress could remain elevated for AU SFB as well. Separately, the bank has counterintuitively cut down its specific PCR to 66% amid rising stress. We believe the merger with Fincare prima-facie could be EPS/BVPS/RoA positive, but we reckon managing HR/tech integration and MFI portfolio management will be an arduous task. Separately, we believe rising asset-quality stress in the bank’s card portfolio and VF portfolio could keep provisions elevated.

Outlook

Thus, we cut our earnings estimates by 7-10%. Factoring in RoA/RoE moderation, rising asset-quality risk, likely merger drag, and potential delay in the universal banking license, we cut our TP further to Rs625/share (earlier Rs650), valuing the bank at 2.8x Dec-25E ABV. We maintain our REDUCE rating.

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