Hold AU Small Finance Bank Ltd For Target Rs.1,250 - ICICI Securities
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Continues to display strong business resiliency
AU SFB (AU) reported strong all-round Q1FY22 financial performance with negative net slippages, collection (114%) reaching pre-covid level in June’21, sustained momentum in deposit mobilisation (up 38% YoY) and disbursement in July’21 at Rs13bn (at normalised level). Digital journey is progressing well, as reflected in accelerated digital adoption post AU 0101 Banking App launch with 2x increase in daily registration, 25% in monthly active users and 100k QRs with 60% activation rate.
Total ECLGS (2.4% of loans) + GNPL (4.3%) + restructuring pool (3.6%) stand at ~10% of loans despite covid-led challenges is outcome of its granular asset book with conservative LTVs and expertise in underwriting newto-credit (formal) customers. However, inactive customer pool of 8% as on June’21 and provisioning pool of 3.6% pose risk to earnings. Downgrade to HOLD (earlier: Add) with unchanged TP of Rs1,250 as we believe current valuation captures most positives.
* Successfully navigating the current NPL cycle. AU’s asset quality performance over the past one year amid covid-led disruption reflects its strong business resiliency and ability of its customer base to bounce back once businesses open up. Customer activation rate remains healthy (at pre-covid level) as on June’21 with full paying customers at 88% and part paying at 4%. Further, incremental restructuring during Q1FY22 was contained at 1.9% of loans and SMA 1+2 at 6.7% with significant overlap from non-NPA moratorium book of ~6% as on March’21. Collections trending well at 114% in June’21 and sustaining the same level in July’21. Total ECLGS (2.4% of loans) + GNPL (4.3%) + restructuring pool (3.6%) stand at ~10% of loans against which it carries provision of 3.6% of loans. The bank prudently made contingency provisions of Rs1.2bn during Q1FY22 to strengthen its balance sheet. It now carries total contingency provision of Rs1.9bn (0.6% of loans). Key risks: a) Stress unfolding higher than anticipated and b) delay in loan growth recovery.
* Digital journey progressing well. AU leapfrogging its digital journey, launched AU 0101 banking super app in mid-June’21, ~90% of sales team digitised, 90% of deposit accounts on-boarded digitally by tabs, 100% merchants on-boarded digitally and in process of moving to 100% digital journey on asset side. Launch of AU 0101 accelerated digital adoption. It also focuses on data & analytics to improve cross selling and deepen customer relationship - ~0.225mn pre-approved offers extended in credit card, personal loans and auto loans.
* Affordable housing to become 3rd largest portfolio over next 4-5 years. Having >10 years of experience in AH space and >3 years on bank’s platform, stabilisation of teams and processes, it plans to scale AHL in medium term.
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