IGI Logo

Earnings to gain traction in FY25

-      AUBANK reported PAT of INR3.75b in 3QFY24 (down 4% YoY, 10% miss), due to higher provisions (up ~4x YoY, 44% beat). NII grew 15% YoY to INR13.25b (in line), while NIMs contracted 6bp QoQ to 5.5%.

-      PPoP grew 18% YoY to INR6.6b even as opex grew 25% YoY (5% higher than our estimate). The cost-income ratio, thus, increased to 63% from 61.3% in 2QFY24.

-      Advances grew 20% YoY (4% QoQ), led by growth in the wholesale book. However, the card business threw a negative surprise, with a surge in delinquencies and provisioning expenses. Deposits grew strongly by 31% YoY (5.8% QoQ), led by term deposits.

-      GNPAs/NNPAs increased 7.6%/18.6% QoQ. Thus, headline GNPA/NNPA ratios deteriorated 7bp/8bp QoQ to 1.98%/0.68%. Credit cost increased to 0.62%. Excluding credit cards, the net credit cost normalized at 0.44%.

-      We cut our FY24E/FY25E EPS by 6-7% and estimate FY25 RoA/RoE of 1.7%/ 15.7%. We retain our BUY rating with a TP of INR800 (3.4x Sep’25E BV).

NIMs compress 6bp QoQ; Provisioning expenses surge

-      AUBANK reported 3QFY24 PAT of INR3.75b (4% YoY decline, 10% miss), led by higher provisions of INR1.6b (~4x rise YoY, 44% higher than our estimate).

-      Other income grew 52% YoY to INR4.5b (10% beat). PPoP thus grew 18% YoY to INR6.6b (in line). Margins contracted 6bp QoQ to 5.5% and the management expects FY24 margins to be at the lower end of the guided range of 5.5%-5.7%.

-      Opex grew 25% YoY (up 8.8% QoQ) as the bank continued to invest in building the franchise. Total income grew 23% YoY (up 6% QoQ), leading to 165bp QoQ increase in the cost-income ratio to 63%.

-      Advances grew 20% YoY to INR667b (up 4% QoQ), led by healthy 10.7% QoQ growth in the commercial asset book. The yield on advances, thus, moderated to 13.2%, owing to a change in the business mix; however, the incremental disbursement yield improved 38bp YTD.

-      Deposits grew strongly at 31% YoY (5.8% QoQ), led by growth in term deposits. The CASA mix, thus, moderated 90bp QoQ to 33%. The cost of funds rose 20bp QoQ to 6.9%.

-      GNPAs/NNPAs increased 7.6%/18.6% QoQ as fresh slippages increased to INR4b (2.9% of loans). GNPA/NNPA ratios thus deteriorated 7bp/8bp QoQ to 1.98%/0.68%. PCR ratio stood at 72% (66% excluding technical w/offs).

-      Outstanding restructured loans declined to INR4.7b (0.7% of loans vs. 0.8% in 2QFY24). The bank carries provisions of INR0.83b on its restructured book.

Highlights from the management commentary

-      The C/I ratio for FY24 is expected to stay flat YoY vs. FY23

-      Excluding credit cards, the net credit cost normalized at 0.44% in 3QFY24. As the credit card book attains a size and gets seasoned, its credit cost will normalize and it is currently in line with the industry average.

-      Normalized credit cost is expected to be ~0.5%-0.6% going forward.

-      The bank has taken cautious steps in unsecured lending, even though this remains a high-yielding and scalable segment. After the merger, the bank wants its MFI book to be ~10% of overall loan book.

Valuation and view

AUBANK reported a mixed quarter as higher provisions dragged down net earnings even as fee/deposit growth stood healthy. Asset quality deteriorated in 3Q, while margins continued to compress and stood at the lower end of the guided range. On the business front, disbursement growth was healthy; however, high securitization affected the growth rate of on-balance sheet advances. Card business threw a negative surprise as delinquencies spiked, leading to an increase in credit costs. The provision coverage improved, while the bank carries tiny contingent reserves of ~INR50m and floating provisions of INR410m. We estimate operating performance to improve after the merger but we remain watchful in the near term. We cut our FY24E/FY25E EPS by 6%/6.5% and estimate FY25 RoA/RoE of 1.7%/15.7%. Retain BUY with a TP of INR800 (3.4x Sep’25E BV).

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412