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Our view  ‐ Lower stress flow to restore confidence on structural asset quality

We believe that key highlight of AU SFB’s performance in such a challenging quarter was significantly lower stress flow when compared to other players operating in similar segments. The portfolio dpd construct was largely intact sequentially and the customer activation rate reverted to pre‐Covid levels in June. Notably, the collection efficiency was resilient in April and May at 94‐95% and swiftly rose to 115% in June thus reversing the flow of delinquent accounts. The continuity of high collection efficiency in July (110%) implies further correction in 30+ delinquency buckets.

Incremental restructuring was also lower than estimated at 1.9% of gross loan book and ECLGS disbursements stood at <1%. The bank booked significant treasury gains of Rs1bn during the quarter which were used to augment Covid contingency provisioning buffer by Rs1.2bn (cumulative at 60 bps of loan book). Another positive feature in Q1 FY22 performance of the bank was sustained rapid progress in granularization of the deposit franchise and moderation in cost of funds. Aided by robust traction in retail SA deposits, the CASA ratio further improved to 26%.

Contribution of retail deposits in total deposits rose to 59%. The structural reduction in funding cost augments, diversifies and de‐risks long‐term growth prospects for AU Bank. AU Bank is the only coverage SFB and NBFC that has seen positive revisions in earnings estimates. We raise multiple also on this confidence restoring show and raise 12m PT to Rs1325. Retain ADD rating on near fair valuations at 4.7x FY23 P/ABV and due to uncertainty related to Covid.  

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