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Motilal Oswal Report
AU Small Finance Bank Ltd.'s return profile is expected to strengthen meaningfully from H2 FY26 as key operating headwinds ease, with a gradual decline in funding costs and normalization of credit costs driving steady profitability improvement.
According to the brokerage RoA is projected to expand from ~1.6% in FY25 to ~1.7% by FY27 and ~1.9% by FY28, while a strong capitalization with CET-1 of ~18% provides ample growth headroom (which could be further bolstered by a potential capital raise in FY27).
Improving operating leverage and margin recovery are expected to drive a material uplift in RoE by FY27β28, supported by better earnings quality.
AU SFB remains well-positioned to sustain robust growth, aided by improving asset quality trends and structurally stronger deposit mobilisation following the universal banking transition.
ICICI Securities estimates AU SFB to deliver ~24% loan CAGR over FY26-28, which, combined with improving operating metrics, should translate into ~36% earnings CAGR over the same period, reinforcing the bank's trajectory toward stronger profitability.
RoA/RoE for FY27E are likely to improve to 1.74%/17.2%, respectively.
The brokerage reiterates Buy with a target price of Rs 1,250 (3.7x Sep'27E adjusted book value).
Key upside triggers include accelerating earnings momentum driven by lower cost of funds and credit costs, a potential capital raise in FY27, and the transition to universal banking, following RBI's relaxation of the earlier NOFHC stipulation for promoter shareholding, thereby simplifying the ownership structure and removing a key overhang.
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