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AU SFB disclosed that it has received regulatory approval (link) for the 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). We expect this extension to ensure top management continuity. Besides, it improves visibility on continuation of its growth journey like in the past – scale with robust asset quality and profitability. We upgrade the stock to BUY from Add with a revised TP of Rs770 (Rs700 earlier), as we believe that the recent correction in the stock price was unwarranted and that it is well poised to deliver >20% advance growth and continue improving the RoE trajectory. We value the stock at 3.5x FY25E vs 3.5x on FY24E
BVPS earlier. As per its 4QFY23 business update, it delivered robust 26% YoY growth in gross advances with the deposit base growing 32% YoY. CASA ratio was flat QoQ at 38.4% in Q4FY23.

* Credit growth remains strong at 26% YoY in FY23; broadly in line with last 5-year CAGR of 30%. Credit growth trajectory in FY23 has remained robust as reflected in its steady sequential loan growth – advances grew 5% QoQ in Q4FY23 vs 7% in Q3FY23, 6% in Q2FY23 and 5.5% in Q1FY23. As per its Q4FY23 business update, demand across products remained robust and incremental growth was not skewed toward any one segment. Further, its new business initiatives showed strong traction, as reflected in the credit card issuance of 0.5mn with monthly spends crossing Rs10bn in March’23 and the QR code deployment surpassing the 1mn mark.

* Asset quality remains pristine; 81% of advances originated post pandemic with GNPA at 0.6% providing comfort. Asset quality performance of AU during the covid phase was a testament to the quality of its asset franchise, resiliency of its customer base, strong risk management and tight credit filters. It maintains pristine asset quality even in the post-covid era, as reflected in the steady decline in the GNPL ratio to 1.8% in Q3FY23. Management sounded confident about sustaining the asset quality as most of its business segments are witnessing improving cash flow and strong collections as per the Q4FY23 update.

* AU to continue investing toward franchise build-up. Over the past two years, AU has been utilising its strong core operations to build up the ‘AU franchise’. Since Mar’20, it added >10,000+ workforce and 350+ banking touch points. It invested ~Rs2.6bn towa building new product lines, brand building and distribution expansion in FY22. It has already invested Rs3.5bn during 9MFY23 toward franchise build-up. The same hasstarted showing early positive results like encouraging adoption of AU 0101 (~30% of total ~3.5mn customers are monthly active on AU 0101), ~30% of total SA acquisition via video banking and 0.3mn live credit card with 53% of card to new-to-bank customers.

* Key risks: a) Stress unfolding higher than our expectation and b) deceleration in loan growth.

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