Emkay Global Sees AU Small Finance Bank Targeting Rs 950

AU Small Finance Bank Sees Continued Growth Amid Margin Expansion

AU Small Finance Bank (AU SFB) has maintained its growth acceleration in the fourth quarter, coupled with a better cost of funds (CoF), leading to further margin expansion. This, along with improving asset quality and thus lower credit cost, resulted in a ~9% earnings beat, with Rs8.3 billion in profit after tax (PAT) and a return on assets (RoA) of 1.8%. However, the bank's cost-to-income ratio remains elevated at 59%, as AU SFB transitions into a retail-heavy 'Universal Bank'.

Key Highlights

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The bank's overall asset quality is trending well, with the gross non-performing assets (GNPA) ratio steadily moderating to 2%, benefiting from contained slippage and strong credit growth. However, the specific provision coverage ratio (PCR) remains at sub-par levels of 64%, which is slightly disappointing. The bank would also need to keep up its guard on the retail portfolio, including the very bad (VF) and bad (BB) segments, which could be vulnerable to business disruption from the prolonged West-Asia conflict.

Despite the challenges, we believe the bank will continue to grow, with earnings raised by 3% each for FY27E and FY28E. We expect the RoA to improve to 1.6-1.8% over FY27-29E. However, we retain a REDUCE rating on AU SFB while raising our target price by ~9% to Rs950 from Rs870, given expensive valuations (3x FY28E adjusted book value) with no margin of safety amid the raging macro-uncertainties.