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AU SFB’s (AU) Q4FY23 has been an eventful quarter – while it continues to deliver robust financial performance as reflected in RoA reaching 2% and RoE at ~16%, re-appointment of Mr. Sanjay Agarwal as MD & CEO and Mr. Uttam Tibrewal as whole-
time director for three years (w.e.f. from 19th Apr’23 to 18th Apr’26) and AD-1 license approval testify its successful SFB journey. This also reinforces our view that strong earnings momentum is likely to continue over FY24/25E. Maintain BUY with an
unchanged TP of Rs770, valuing the stock at 3.5x FY25E BVPS. Earnings came in at Rs4.3bn, up 8% QoQ, driven by strong other income (13% QoQ), credit cost at only 30bps and lower tax rate at 20%. Deposits grew 32% YoY with CASA ratio remaining flat YoY at 38.4%. Gross advances grew 26% YoY; however, adjusted for assigned / securitised loans, the same grew 34% YoY during Q4FY23. The quarter saw a steady decline in GNPL ratio to 1.7% with PCR improving to 75% and slippage ratio moderating to 1.3% (lower than pre-covid level). As on Mar’23, it carries total provision pool of Rs11.3bn (1.9% of advances). Management expects NIM to contract in FY24 given the opening cost of funds in April’23 remained higher at 6.44% vs full year FY23 CoF at 5.96%.

* Credit growth remained strong at 5% QoQ despite higher securitisation; business growth is likely to sustain at 28-30% in FY24E. Credit growth trajectory during FY23 remained robust as reflected in steady sequential loan growth – advances grew 5%
QoQ during Q4FY23 vs 7% in Q3FY23 vs 6% in Q2FY23 and 5.5% in Q1FY23, thereby, taking cumulative credit growth to 26%. Incremental growth was largely driven by commercial banking division (up 14% QoQ), HL (16% QoQ) while growth in SBL
remained muted at 2.4% QoQ. Vehicle book fell 2% QoQ largely due to higher securitisation at Rs38.5bn as on Q4FY23 vs Rs9.1bn in Q4FY22. Considering improved credit off-take, robust industry vehicle volume sales and its strong distribution network,
management expects full year FY24 business growth to exceed 25%.

* NIM moderated marginally to 6.1% during Q4FY23, but 30bps QoQ decline in spread raises concern over NIM trajectory in near term. NIMs moderated marginally by 10bps QoQ to 6.1% during Q4FY23 mainly due to 30bps QoQ increase in the cost of
funds. Asset yield remained flat QoQ at 13.4% during Q4FY23. Strong systemic credit growth, coupled with tight liquidity, is intensifying competition in deposits. The same is likely to result in higher deposit rate going forward. The same reflects in 15bps increase in incremental cost of funds in April’23. It poses risk in NIM compression over FY24E. Management highlighted that it is calibrating its funding mix to curtail the adverse impact on NIM due to higher deposit cost.

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