Despite short-term credit cost pressures, AU Small Finance Bank seems to be well-positioned to maintain its RoA in-line with management guidance of 1.6% for FY25 and reach ~1.8% by FY27E. This resilience is driven by strong loan growth, rising contribution from fee based income and cost efficiencies as bank gains scale and led by synergies.
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ICICI Securities Report
AU Small Finance Bank Ltd.’s profitability, post merger in April 2024, was impacted due to elevated credit cost on the back of higher-than expected delinquencies in its credit card /microfinance portfolios and net interest margin compression.
While near-term challenges persist, we believe RoA at 1.5%, as on December 2024, has bottomed out and shall witness a steady uptick Q1 FY26E onwards.
Key drivers for RoA expansion would be:
normalisation in MFI credit cost to ~3% (9M FY25 credit cost at 5.41%);
course correction in CC business to pare credit costs and align with industry average of 6–7%; and
a falling rate cycle auguring well for cyclical recovery in net interest margin (~64% of assets are fixed price).
On balance, we expect RoA improving ~30 bps to 1.8% by FY27E. With likely improvement in profitability and the recent stock price correction (~15% in past one–three months), we upgrade the stock to Buy (Hold earlier) with a revised target price of Rs 725 (earlier Rs 625), based on ~3x Sep’25E book value per share (earlier: 2.5x).
The stock is currently trading at two times/1.7 times FY26E/FY27E BVPS.
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