Target: ₹600

CMP: ₹666.25

AU Small Finance Bank continues to grow its credit portfolio at a healthy pace, defying industry trend and the declining MFI/Card book. However, higher CoF and interest reversal on MFI/Card NPAs has led to continued margin correction (10bps q-o-q). This, along with elevated credit cost, has kept the bank’s RoA in check at 1.3 per cent in Q4 and at 1.5 per cent in FY25.

Though the bank remains confident of clocking strong growth in FY26, it expects margins to remain soft and credit costs to be elevated in H1-FY26. As per management, about 16 per cent of the portfolio remains affected by MFIN 2.0 guidelines (around 13 per cent loans have more than 3 lenders, and remainder have total unsecured exposure of more than ₹2 lakh), and would be closely watched.

Given the macro uncertainty, and asset quality and cost pressures in the run-up to the transition toward it becoming a universal bank, the management has resisted providing RoA guidance for FY26E. The management expects to secure a universal banking licence in CY25 and would take a call on capital-raising accordingly.

We retain Reduce with unchanged TP of ₹600 (2x FY27E ABV), and wait for better clarity on the asset quality/margin trajectory.

Key risks: Faster than expected margin/asset quality turnaround.

Published on April 23, 2025