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Core income growth and asset quality remains strong

AU Bank delivered a stronger performance over expectations set by the pre-quarter disclosures. Adjusted for the lower PSL income, there was a PPOP/PAT beat of 5- 6%/10-11% respectively. Notably, bad debts recovery and the quantum of contingency/restructuring provisions utilization/reversal was higher in this quarter. At the core, growth in NII and Opex was in-line with expectations, while fee growth and asset quality trends were stronger. Resilient NIM, improving core fee yield, mild moderation in cost/income ratio and modest credit cost underpinned robust RoA/RoE (2%/15%) performance. Our FY23/24 earnings estimates underwent mild upgrades. While we hold constructive view on the stock with an ADD rating (12m PT of Rs745), NIM/Spread and cost/income trends would be closely monitored.

Strong loan growth and outlook

Bank’s 7% qoq/38% yoy gross advances growth in Q3 FY23 was driven by Wheels (up 3% qoq/35% yoy), Affordable Home Loans (up 10% qoq/76% yoy), Business Banking (up 13% qoq/89% yoy), Agri Finance (up 14% qoq/99% yoy) and other commercial banking products (NBFC and RE financing books). Traction in Secured Business Loans continues to be relatively muted (portfolio up 4% qoq/20% yoy/disbursements up 15% qoq/3% yoy), notwithstanding much lesser rate hikes taken and broadening of customer segment focus. Management remains confident of delivering the guided 25- 30% loan growth in FY23 and continuing the momentum in FY24. Distribution and customer franchise expansion will remain key pillars.

Asset quality and credit cost on strong footing

Collection efficiency for Q3 FY23 sustained at a higher level of 107%, reflecting robust repayment pattern across buckets aided by strong business momentum for customers and increased awareness to pay dues on time. Moderation in slippage ratio (1.7%) and sustained material upgrades & recoveries drove further decline in Gross/Net NPL levels, even as loan write-offs remain marginal. Std. restructured accounts declined to 1.4% (from 1.7%), with loans worth Rs380mn upgraded basis satisfactory performance. Slippages from the original Covid restructuring book remains below 15%, underlining the sufficiency of current provisions held (Rs1.3bn). Loan book originated since the start of the pandemic stood at 81% of advances (77% as of Q2) and this pool has been exhibiting better than historical asset quality trends with GNPA at 0.6% and 92% book being current. This coupled with encouraging momentum in NPL resolutions augurs well for future credit costs. Further, the bank has remaining contingency provisions of Rs1bn.

Key monitorable would be NIM and Cost/Income

Incremental spread dipped 30 bps on 23 bps increase in incr. CoF and due to flattish incr. yield (lack of desired pick-up in SBL and higher share of commercial banking). Book spread was largely flat though, aided by repricing of the back-book in AHL, BB, Agri and other commercial segments and lending rate hikes taken in VF and HL segments. Recent rate hike/tweaking for retail TD/SA, repricing lag in portfolio and product/customer mix dynamics could pressurize NIM and portfolio spread in the near term. There are indications of the Cost/Income ratio having peaked out. Rate of increase in opex is coming-off notwithstanding sustained investments towards distribution, digital and brand. Employee base declined for second successive quarter on shedding of excess collection capacity.

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