AU Small Finance Bank - Building Strong Foundation For Sustainable Growth: Motilal Oswal

Motilal Oswal Report

AU Small Finance Bank Ltd. has historically reported healthy return on assetss; however, this has seen compression over FY24, primarily due to a decline in margins and a rise in credit costs.

While the merger with Fincare small finance bank is earnings per share, book , and return on asset accretive, aided by stronger return ratios in micro finance, gold, and securities-based lending loan portfolio, the competition for liabilities and integration costs will largely offset any near-term benefit.

However, we believe that RoA should gradually improve toward 1.7% by FY26E as the bank benefits from operating synergies, while moderation in funding costs also enables an improvement in margins.

By strategically incorporating ~7.5% of the rural-focused MFI portfolio into AU Small Finance Bank's loan book, the merger helps diversify AU Small Finance Bank’s lending portfolio, while boosting overall yields. Moreover, Fincare's robust presence in southern India augments the bank's geographical footprint.

We believe that the bank’s execution capability will play an important role in maintaining robust growth and asset quality metrics while delivering healthy RoA to its stakeholders.

We are optimistic about smooth execution, given the management’s execution prowess and track record over the past couple of decades.

We reiterate our Buy rating on the stock with a target price of Rs 720 (2.7 times FY26E book ).

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