AU Small Finance Bank Has More Than 30% Upside, Says Morgan Stanley After Hiking Target Price

Morgan Stanley has raised its target price on AU Small Finance Bank Ltd., citing confidence in the lender's growth prospects through fiscal year 2027.

In its latest note, Morgan Stanley has raised its target price to Rs 1,000 from Rs. 860 while maintaining an 'overweight' rating on the scrip. The stock is currently trading Rs 745, which suggests a sizable upside.

The firm believes AU Small Finance Bank is poised for stronger growth in the second half of FY26. They expect the momentum to increase further going into FY27.

“The setup post Q2 appears strong—NIM should trough, loan growth should accelerate, and credit cost should moderate,” the note said.

Margin pressure has been a common problem for AU Small Finance Bank in recent quarters, especially amid high interest rates and high-cost deposits.

However, Morgan Stanley believes these overhangs should come off soon, with the lender likely to see a higher net interest margin, potentially rising 30-50 basis points over the next six quarters.

This is directly linked to an easing rate cut cycle enforced by the Reserve Bank of India in this calendar year.

The note also says that loan growth for the lender could improve due to the improving macroeconomic conditions as well as RBI's rate cuts seeping into the credit cycle. AU Small Finance Bank is in a position to leverage from this development due to his its diverse product offerings, including a digital franchise in southern India.

As far as credit costs are concerned, the notes forecasts it at around 1.1% of assets, with a further relief expected in FY27. This is because of the fact that credit costs tied to secured loans have stabilised while costs on unsecured lending also remains manageable.