AU Small Finance Bank Launches Institutional Share Sale

AU Small Finance Bank Ltd. launched its qualified institutional placement on Tuesday as the lender looks to raise growth capital.

The issue is set at a floor price of Rs 1,181.06 per share, on which the lender may offer a discount of not more than 5%, according to its exchange filing after market hours. The bank's capital-raising committee, it said, will meet on March 15 to determine the issue price and the discount to be offered on its shares post the QIP launch. The lender would seek its shareholders' approval on the same on July 21.

The bank, according to three people aware of the development, is looking to raise between Rs 600-700 crore via the equity issuance.

The capital raise is part of the bank’s plans to raise funds for meeting its growth requirements, which had earlier been delayed due to unfavourable market conditions soon after the pandemic hit, one of the persons cited above said. In May last year, the lender’s board had approved a plan to raise Rs 2,500 crore, which it said would be mobilised through QIPs or other such instruments.

Even as the markets rebounded to pre-pandemic levels, the Jaipur-based lender has remained cautious and has decided on a much smaller issue size than anticipated earlier, another person cited earlier said. The lender has appointed Axis Capital as the sole banker to manage the fundraise, the person said.

AU Small Finance Bank and Axis Capital have yet to respond to emailed queries.

The small finance bank, which counts American investment firms Wasatch Global and Capital Group, Singapore government’s investment firm Temasek, and Mauritius-based Westbridge Capital as its largest public shareholders, is largely held by its founder and Chief Executive Officer Sanjay Agarwal’s family that holds 28.98%.

In December, private equity firm Warburg Pincus sold a 4.47% stake in the bank for about Rs 1,248 crore through open market transactions, of which Westbridge Capital bought shares worth Rs 542 crore to bring its shareholding in the bank to 3.89%, according to exchange data on bulk deals.

The lender had also raised Rs 525 crore from Temasek’s wholly owned subsidiary Camas Investments Pte in Dec. 2019, as it paid the last tranche towards its total investment worth Rs 1,000 crore for acquiring a 4.8% stake as announced by the company in June 2018.

Incorporated in 1996 as a non-banking financial company, the lender received a licence to operate as a small finance bank from the Reserve Bank of India in 2016 and started banking operations from April 2017. In July 2017, the bank got listed on the exchanges. As of December, the bank claimed to have 728 touch points and 18.8 lakh customers across 15 states in India. Its total advances stood at Rs 30,355 crore, while its deposits were at Rs 29,708 crore. The bank’s net worth was Rs 5,403 crore.

Over three-fourths of its gross advances worth Rs 30,355 crore were concentrated on small business and vehicle loans. Besides these, the bank also gave loans to non-banking financial companies, along with business banking loans, home loans, agricultural-SME loans, gold loans, consumer durables loans, working capital, and overdraft facilities. Its loan book is mainly concentrated in Rajasthan, Maharashtra, Madhya Pradesh and Gujarat that comprised 81% of the bank’s total assets.

“Our concern with AU Small Finance Bank mainly arises from asset quality due to its high exposure to vehicle and SME financing that were impacted the most during the pandemic. Further, after its sale of housing finance subsidiary Aavas Financiers, the bank does not have a non-core asset to fall back on,” said Anand Dama, research analyst at Emkay Global Securities. The other area of concern is the bank's rich valuations, he said.

In the aftermath of the pandemic, the bank’s pro forma gross non-performing assets rose to 3.3% of its total advances as of nine months ended Dec. 30, compared to 1.9% in the year-ago period. The pro forma gross NPA ratio adjusts for the impact of a Supreme Court interim order that prevented banks from tagging stressed accounts as NPAs after August 2020. The bank’s capital adequacy ratio stands at 18.8% as of December-end.

As of Tuesday, AU Small Finance Bank’s shares closed at Rs 1,231.25, 2.68% lower than its previous day's closing price on the BSE. The bank trades at a price-to-book ratio of 8.81 times, according to Bloomberg data.

(Adds updates after the QIP opened on March 9, 2021. An earlier version misstated ICICI Securities was also a manager to the issue.)