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Nirmal Bang Report
AU Small Finance Bank Ltd. held an analyst meet to discuss the roadmap for the next three years up to FY27 and its strategy post-merger with Fincare Small Finance Bank, all approvals for which have been received and it will be effective from April 1, 2024.
The bank has guided for scaling up its return on asset from 1.5% in Q3 FY24 to 1.8% by FY27, which it expects to achieve by way of expansion into higher RoA businesses and returns from investments in new businesses.
It expects deposits to grow by 23-25% and loan growth to be same. Focus is being laid on improving branch profitability. Credit cost is expected to remain range-bound, with no major negatives expected.
In our view, while in near term funding cost increase and merger integration costs could weigh on the return ratios, in the longer term, AU SFB will benefit from Fincare SFB's presence in better yielding south geographies and higher yielding segments of micro finance, securities-based lending and gold loans.
Post incorporating the merged entity numbers, we estimate loan book and profit after tax to grow at a compound annual growth rate of 29.1% and 27.7%, respectively over FY23- FY26E.
We estimate RoA to improve to 1.7% by FY26E. We maintain ‘Buy' on AU SFB with a target price of Rs 721 (three times December 2025E adjusted book value).
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