AU Small Finance Bank Q3 Review - High Provisions Dent Earnings; Asset Quality Deteriorates: Motilal Oswal

Motilal Oswal Report

AU Small Finance Bank Ltd. reported profit after tax of Rs 3.75 billion in Q3 FY24 (down 4% YoY, 10% miss), due to higher provisions (up ~four times YoY, 44% beat). Net interest income grew 15% YoY to Rs 13.25 billion (in line), while net interest margins contracted 6 basis points QoQ to 5.5%. 

Pre-provision operating profit grew 18% YoY to Rs 6.6 billion even as opex grew 25% YoY (5% higher than our estimate). The cost-income ratio, thus, increased to 63% from 61.3% in Q2 FY24.

Advances grew 20% YoY (4% QoQ), led by growth in the wholesale book. However, the card business threw a negative surprise, with a surge in delinquencies and provisioning expenses. Deposits grew strongly by 31% YoY (5.8% QoQ), led by term deposits.

AU Small Finance Bank's gross/net non-performing assets increased 7.6%/18.6% QoQ. Thus, headline GNPA/NNPA ratios deteriorated 7 bp/8 bp QoQ to 1.98%/0.68%.

Credit cost increased to 0.62%. Excluding credit cards, the net credit cost normalised at 0.44%.

We cut our FY24E/FY25E EPS by 6-7% and estimate FY25 return on asset/return on equity of 1.7%/ 15.7%. We retain our 'Buy' rating with a target price of Rs 800 (3.4 times September-25E book value).

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