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Earnings miss driven by treasury loses and structural investments

AU Bank delivered a mixed performance in Q1 FY23 wherein reported PPOP/earnings were impacted (lower 25%/23% than our estimates) by lower other income (Rs0.55bn MTM and realized losses on treasury investments) and higher opex (sustained franchise development/growth investments), negating a strong performance on AUM growth (5% qoq/37% yoy), NIM (NII growth in-line with AUM) and asset quality (low ann. credit cost of 30 bps). Notably, the bank did not choose to utilize the contingency provision buffer meaningfully (at Rs1.4bn v/s 1.6bn as of March) to cushion earnings from the non-recurring treasury losses.

Management commentary strong, besides the raising of C/I guidance

Key Management commentary included a) aspiration to grow at 30% pa while protecting margins, b) NIM to be maintained for FY23 (50-60bps rate hike already taken across products), c) continuance of CASA-led deposits growth (no SA rate tweaking), d) no significant incremental MTM hit on investment portfolio, e) core Cost/Income ratio to be at 60-62% in FY23 (earlier guidance 57-59%), f) raising of equity capital of up to Rs30bn (6-7 ppt of Tier-1 augmentation) and g) unchanged assessment of slippages from OTR portfolio (2.1% of AUM) and adequacy of current provisions.

All-round loan growth; controlled slippages from OTR portfolio

Bank’s loan growth in Q1 FY23 was driven by Wheels (up 9% qoq/44% yoy), Affordable Home Loans (up 13% qoq/112% yoy), Business Banking (up 13% qoq/90% yoy), and Agri Finance (up 19% qoq/120% yoy). Though about 70-75% of book is at fixed rate, the bank does not intend to tweak its SA rate (CASA at 39%). Even as investments in new business initiatives (Credit Cards, UPI QR and Video Banking), Branch Banking and digital/tech would continue, the core C/I ratio is anticipated to improve with time and scale (long-run expectation of <50%). Abs. GNPL increased by 5% qoq (no product skewness) which was a combination of controlled slippages from OTR portfolio (30% contribution in GNPL addition), usual flow (ann. less than 2%) from non-OTR std. book and sustained strong collections/recoveries. Lower net slippages and some utilization of contingency provision drove a benign credit cost in the quarter.

Earnings undergo cut; capital raise a key monitorable

Our FY23/24 estimates for earnings/PAT undergo a cut of 5-7% and of ABV increases by 14-19% as we factor a higher cost/income range and a capital raise of Rs25bn (30% of current NW). Consequently, average RoA/RoE delivery over FY22-24 is now estimated at 1.8%/14.7%. The AUM and earnings CAGR is estimated at 27-28%. Retain constructive stance and an ADD rating on AU Bank. Stock trades at 3x FY24 P/ABV

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