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Business momentum robust; asset quality deteriorates sequentially

Watchful of asset quality; credit cost to stay elevated in the near term

* AUBANK reported a weak 4QFY21, with earnings impacted by one-offs in the form of higher interest reversals and increase in opex, led by ESOPrelated expenses. However, business momentum was robust, with retaildeposit mix improving further.

* Asset quality developments: GNPA/NNPA increased to 4.3%/2.2%, led by tagging of customers who are less than 90dpd and paying, but was once NPA ('ONAN') during prior quarters. However, CE and customer activation rate moved higher than pre-COVID levels. We remain watchful of asset quality in the near term and cut our FY22E/FY23E earnings by 20%/17% to factor in higher credit cost. Maintain Buy.

PAT impacted by one-offs in interest income and opex; PCR declines to 50%

* AUBANK reported 4QFY21 PAT of INR1.69b (MOFSLe: INR2.64b), impacted by higher opex and elevated provisions. NII grew 24% YoY to INR23.6b in FY21. FY21 PPOP/PAT grew 80%/74% to INR21.6b/INR11.7b, aided by gains of INR5.7b from stake sale in AAVAS.

* NII grew 18% YoY (+4% QoQ) to INR6.6b (5% below our estimate), affected by higher interest reversal of INR660m. Margin contracted 30bp QoQ to 5.3%. Other income grew ~51% YoY to INR2.77b, aided by PSLC fee income of INR1.04b in 4QFY21.

* Operating expenses rose sharply (~32% each QoQ/YoY) to ~INR5.6b due to one-off increase in ESOP expenses of INR590m. The core C/I ratio increased to 59.4% v/s 54.4% in 3QFY21. PPOP grew 18% YoY to INR3.74b, while core PPOP growth stood ~30% YoY.

* Total AUM grew 22% YoY (+14% QoQ) to INR377b, with retail AUM forming 91% of total AUM. Net advances grew ~28% YoY (+14% QoQ). Disbursements picked up well and grew 48% YoY to INR74.2b in 4QFY21, driven by growth across most segments.

* Total deposits grew strongly (~38% YoY/~21% QoQ) to INR360b. Retail deposits (CASA + Retail TD) mix increased to 55% of deposits (v/s 43% in 4QFY20). CASA ratio (excluding CDs) increased to 23% v/s 22% in 3QFY21.

Asset quality: What happened and why?

* What happened? GNPA ratio increased to 4.3% v/s pro forma GNPA ratio of 3.3% in 3QFY21. This was due to a particularly affected stressed pool that was less than 90dpd and paying, but were ‘once NPA’ and have been tagged as NPAs now. This resulted in an increase in NPL’s by INR5.4b (1.6% of loans). PCR declined to ~50% v/s ~61% in 3QFY21, with the bank carrying additional contingent provisions of INR700m. Also, total restructured loans increased to 1.8% v/s 1.5% guided for in 3QFY21. The bank carries a provision of INR1.15b on this.

Valuation and view

AUBANK’s reported earnings were impacted by one-offs in the form of higher interest reversals and increase in opex, led by ESOP-related expenses.

On the business front, retail deposit mix continues to improve, while AUM growth remains strong. Asset quality witnessed a deterioration, while the restructuring book stands at 1.8% of loans. Collection efficiency and customer activation rate have moved higher than pre-COVID levels, with ~81% of loans at zero dpd, similar to FY20.

However, PCR declined sharply, affected by higher slippages from ONAN assets. We remain watchful on asset quality and cut our FY22E/FY23E earnings by 20%/17% to factor in higher credit cost. We estimate AUBANK to deliver FY23E RoA/RoE of 1.9%/17.2%. We value the stock at INR1,175 per share (4.3x FY23E BV) and maintain Buy.

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