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Playing for the long innings – Earnings growth to accelerate from FY25; Upgrade to BUY

* AUBANK delivered an impressive 54%/34% CAGR in deposits/loans over FY18-23. It has evolved as a strong franchise not just in the SFB segment but in the overall mid-cap banking space.

* Scale-up of new products, widening geographical reach, aggressive investments in technology and thrust on physical expansion should support long-term growth. We estimate the bank to maintain industry-leading loan growth at ~28% CAGR over FY23-25E.

* While near-term pressure on margins will remain an overhang on stock performance, we estimate earnings growth to accelerate from FY25 onward to 35% YoY after 22% YoY growth in FY24, leading to RoA/RoE of 1.9%/17%.

* AUBANK’s stock has corrected ~12% in the past few months and is now trading at 3.2x FY25E BV vs. 3-year/5-year average valuations of 3.8x/4.0x P/BV.

* We thus upgrade our rating to BUY with a TP of INR825 (based on unchanged 3.7x FY25E BV).

Deposit mobilization imperative to support growth

AUBANK has progressed well in building a granular liability franchise. The bank reported a 54% CAGR in total deposits over FY18-23, led by CASA deposits, which saw a 66% CAGR over the same period. The CASA mix, thus, improved from 23% in FY21 to 38.4% in FY23. The mix of retail term deposits also improved to 51% in 1QFY24. However, given the sharp rise in interest rates and rising competition for deposits, maintaining a healthy growth rate in liabilities is imperative to support robust loan growth.

* AUBANK has significantly deployed additional liquidity on the balance sheet as LCR ratio declined from 151% in 4QFY23 to 119% as on 1QFY24.

* The bank’s CD ratio has increased to ~91% vs. ~84% in 4QFY23. We thus expect the bank to focus on raising deposits and we estimate a 26% deposit CAGR over FY23-25.

Loan growth steady; estimate 28% CAGR over FY23-25

* AUBNAK reported 29% loan growth in 1QFY24 vs. a 5-year CAGR of 48% over FY17-22. Retail loan mix continues to dominate with a share of ~79%. The bank is focusing on diversifying the loan book, with Home Loans seeing strong traction. The wholesale book has also grown at a healthy pace. The management focuses on strengthening the key business lines of Vehicle Loans and MSME and scaling up new segments, such as Housing Loans, Gold Loans, Credit Cards, Consumer Durable Financing, etc. Strong investments in the business and widening geographical reach will continue to aid business growth and further reduce geographical concentration. We thus estimate loan growth to remain steady at ~28% CAGR over FY23-25.

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