Motilal Oswal Maintains 'Buy' On AU Small Finance Bank, Revises Target Price — Check Details

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Motilal Oswal Report

AU Small Finance Bank Ltd. remains well-positioned to deliver best-in-class business growth and earnings CAGR, supported by steady improvement in operating metrics and strong execution across its diversified secured businesses.

Secured businesses across vehicle finance, mortgages and commercial banking continue to perform well and offer a strong growth outlook in the coming years.

Asset quality cycle is showing signs of bottoming out, with slippages and credit costs moderating in Q2 and CE in MFI business showing further improvement. This provides confidence that credit costs will remain within the 1% as per FY26 guidance and trend toward the long-term 75-85bp range thereafter.

The RBI’s in-principle nod for the universal bank license is a remarkable milestone and will meaningfully enhance brand trust, unlock broader deposit pools, improve CoF, and accelerate cross-selling across wealth, insurance, forex and payments. With the cost of funds already declining and NIMs expected to expand over the coming quarters, the margin trajectory appears constructive.

We model ~23-24% loan CAGR over FY26-28, supported by strong secured growth engines (VF, mortgages, gold, commercial banking) and normalization in MFI and cards.

This, coupled with improving cost efficiency and rising fee income, should drive 34% earnings CAGR over FY26-28E.

Notwithstanding the strong rally in the stock price, we remain excited about AU Small Finance’s growth and earnings prospects and reiterate it as our preferred Buy in the mid-size banking space.

We revise our target price to Rs 1,100 (premised on 3.3x Sep’27E book-value).

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