'Buy' AU Small Finance Bank Maintains Motilal Oswal On Favorable Risk-Reward — Check Target Price 

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Motilal Oswal Report

AU Small Finance Bank Ltd. remains strategically well-positioned to sustain robust growth, underpinned by steady improvements in operating metrics and effective execution despite ongoing challenges in unsecured business ebbs.

An improved asset quality backdrop should enable moderation in credit cost during H2 and help sustain it at controlled levels in the medium term.

The RBI’s in-principle approval for a universal banking license marks a pivotal step, potentially easing regulatory limitations and enhancing AU Small Finance Bank’s brand positioning. This transition is expected to drive stronger deposit mobilization and improve deposit productivity.

While AU Small Finance Bank’s net interest margin may face near-term pressure due to residual loan repricing, improvement in asset mix and gradual decline in funding costs should aid its margin from H2.

We estimate AU Small Finance Bank to deliver 24% loan CAGR over FY26-28, which, coupled with improvement in operating metrics, will enable a 33% earnings CAGR. The recent correction in stock price has made the risk-reward favorable. Hence, we reiterate our Buy rating on the stock with an unchanged target price of Rs 875 (based on 2.8x FY27E book value).

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