Add AU Small Finance Bank Ltd For Target - Yes Securities
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Significant improvement in asset quality was the key surprise
Our view
AU Bank delivered a sizeable beat on earnings even adjusted for the higher PSLC income, aided by strong AUM growth, significant recovery in core fees, further decline in funding cost and a sharp improvement in asset quality which drove negligible credit cost. Disbursements were up 2.7x qoq and 57% yoy with a sharp recovery in business originations across vintage segments (Wheels and SBL MSME) and newer segments (HL, BB and Agri SME). Though AUM spread was stable at 7.8%, the incremental spread recovered sharply to 7.4%. Disbursement yields improved sequentially, partly aided by normalization of new business mix and further reduction in incremental CoF on the back of CASA and Retail share in deposits rising to 30% and 64% respectively.
Underpinned by higher disbursements, the loan assets processing fees jumped 3.3x qoq. Notwithstanding strong revenue growth, the cost/income ratio rose on account of investments in brand building, QR, credit cards and video banking. Provisions were negligible with substantial reduction in Gross NPLs (by 115bps qoq to 3.2%) achieved via collections and recovery mechanisms (no write-off). The released NPL provisions of Rs1.7bn were largely utilized to augment the contingency provisioning buffer which now stands at Rs3bn (84 bps of net adv.). Incremental restructuring and disbursements under ECLGS were marginal at 20-25 bps of gross adv. Outstanding restructuring and ECLGS portfolios stood at 3.6% and 2.4% respectively. Behavior of the latter is not much different from the overall standard book, and slippages from Restructured 1.0 pool are evolving in line with expectations/provisioning
We retain positive stance on AU Bank with a view that growth and asset quality performance would continue to be strong with RoA also getting a fillip from a secular improvement in funding cost. We estimate RoA expansion of 40 bps over FY22-24 and RoE reaching 18% in FY24 with healthy capital levels. Maintain ADD rating and raise 12m PT to Rs1385.
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