AU Small Finance Bank: After 11% jump in April, the stock is Axis Securities’ ‘pick of the week’

The brokerage has a ‘buy’ call on the stock with a target price of ₹702, implying a potential upside of over 12 percent.

AU Small Finance Bank (AUSFB) is a retail-focused small finance bank offering a diverse range of products including Vehicle Finance, SME, Home Loans, and Business Banking, among others. Its target market comprises low and middle-income individuals and businesses with limited or no access to formal banking and finance channels. As of December 2023, the bank operates through 1,049 touch points across India.

Stock Price Trend

The stock has lost 6 percent in the last 1 year and 19 percent in 2024 YTD. The stock has witnessed some recovery in April on strong March quarter (Q4FY24) advances and deposit growth. However, it was in the red in the first 3 months of this year, down around 1 percent in March, 10.5 percent in February and over 19 percent in January.

Currently trading at ₹638.35, the stock is over 21 percent away from its record high of ₹813.00, hit on January 8, 2024. Meanwhile, it has risen over 15 percent from its 52-week low of ₹554, hit on March 20, 2024.

Q4 Advances and Deposits

During the March quarter, AU Small Finance Bank reported a robust 25-26 percent growth in advances and deposits. Despite a challenging macro landscape marked by intense competition for deposit mobilisation and ongoing systemic liquidity deficits, the bank noted a slight easing compared to the previous quarter. The credit environment remained buoyant, supported by strong on-ground activity and sustained demand across various sectors.

Against this backdrop, the bank delivered a solid operational performance, witnessing a 9 percent quarter-on-quarter growth in both deposits and advances. With a focus on deposit-led asset growth, the bank aims to enhance scale and efficiency further through the amalgamation of Fincare Small Finance Bank.

To build a sustainable business model, AU SFB has intensified efforts to protect incremental margins. Encouragingly, there are indications of progress, with the incremental cost of funds declining by 4 basis points to 7.71 percent, and the incremental disbursement yields increasing by 8 basis points to 13.56 percent compared to the previous quarter.

The robust deposit growth was primarily driven by strong CASA mobilisation, with incremental CASA deposits growing by 10 percent quarter-on-quarter. Advances also saw strong growth across retail and commercial banking segments, with the bank achieving its highest-ever disbursements in March.

Asset quality remained within the long-term range, with the bank securitising loans worth ₹616 crore during the quarter. The overall gross loan portfolio grew by 8 percent quarter-on-quarter and 28 percent year-on-year. Additionally, the bank maintains sufficient liquidity through LCR investments and high-quality non-SLR investments.

Investment Rationale

Strong business growth to continue; merger offers diversification benefits: The brokerage noted that AUSFB aims to maintain its growth momentum by targeting a 23-25 percent CAGR in deposits by FY27E, focusing primarily on individual and retail deposits. This growth strategy extends to its asset side, aligning the loan book expansion with deposit growth. Following the completion of the merger with Fincare SFB, AUSFB will have the capability to offer a comprehensive range of products catering to diverse customer segments. The merger will significantly enhance the bank’s distribution network, provide opportunities for geographical expansion, and broaden its customer base, thereby facilitating healthy growth prospects, stated Axis. It anticipates AUSFB to achieve a 32/34 percent CAGR growth (inclusive of merger impact) in terms of deposits/advances over FY24-26E.

Margins likely to improve gradually: As per the brokerage, the shift in portfolio mix towards higher credit quality but lower-yield products, coupled with 75 percent of the loan book being fixed, resulted in spread compression for AUSFB. Moreover, unexpected liquidity tightening, prolonged higher interest rates, and heightened competition exacerbated margin pressure during 9MFY24. 

However, there are signs of improvement as incremental CoF experienced a slight moderation in Q4FY24 (down by 4bps QoQ), while incremental disbursement yields have seen improvement (up by 8bps QoQ). Additionally, the merger with Fincare presents AUSFB with the opportunity to venture into the microfinance segment (a ‘Higher RoA-Higher Risk’ segment). Furthermore, AUSFB’s strategic shift towards enhancing the share of higher-yielding businesses should provide further support to the bank’s margins, said the brokerage.

Asset quality to remain stable: Except for the credit card portfolio, credit costs and asset quality trends have largely normalised, noted Axis. The management has noted that in the near term until the credit card book is built and seasons, credit costs will stay between 6-7 percent and will eventually stabilise near industry averages. Similarly, on the secured book, credit costs are projected to remain steady at 0.5-0.6 percent. Following the merger with Fincare SFB, microfinance credit costs are expected to be limited to around 3 percent, said the brokerage. It estimates that AUSFB’s asset quality will remain mostly stable over the medium term, barring any external shocks.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.

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Published: 15 Apr 2024, 02:10 PM IST