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Strong overall performance; business momentum set to accelerate

Asset quality surprises positively; collection efficiency remains buoyant

* AUBANK reported a strong all round performance, with a 25% earnings beat, led by a healthy (40% YoY) NII growth and controlled provisions (14% below our estimate). NIM improved by 30bp QoQ to 5.6%, aided by a sharp improvement in the cost of funds and lower interest reversals.

* Asset quality trends were stable sequentially in a challenging environment, with slippages at INR2.5b (annual slippage ratio ~2.9%), while higher reductions of ~INR2.6b led to stable asset quality ratios. Collection efficiency stood at 101% in 1QFY22, which improved further in Jul’21.

* Total restructured book increased to 3.6% of loans. We increase our FY22E/FY23E earnings estimate by ~8%/~11%, and expect a RoA/RoE of 1.9%/17.6% in FY23E. We maintain our Buy rating.

Strong earnings beat; asset quality trends stable sequentially

* AUBANK reported a PAT of INR2b (25% beat) in 1QFY22, aided by a healthy NII and controlled provisions (14% below our estimate). NII grew 40% YoY to INR7.2b (6% above our estimate), aided by 20bp QoQ reduction in the cost of funds. NIM improved by 30bp QoQ to 5.6%. Other income fell 18% YoY to INR1.8b, led by a decline in fee/PSLC income.

* Opex fell 18% QoQ to INR4.6b. The C/I ratio stood at 50.3% v/s 59.9% in 4QFY21. PPOP grew ~1% YoY to INR4.5b. Core PPOP grew ~34% YoY.

* On the business front, total AUM grew 22% YoY (down ~3% QoQ) to INR366b, with Retail AUM constituting 85% of the total AUM. Among segments, Retail/Wholesale assets declined by 1%/5% QoQ. Net advances grew ~29% YoY (2% QoQ decline). Total deposits grew strongly (38% YoY/3% QoQ) to INR370b. Retail deposit mix rose to 59% of deposits (v/s 55% in FY21). CASA ratio increased to 26% v/s 23% in 4QFY21.

* On the asset quality front, total slippages stood at INR2.5b (annualized slippage ratio at 2.9%), while higher reductions of ~INR2.6b led to stable asset quality trends. The GNPA/NNPA ratio increased by 6bp/8bp QoQ to ~4.3%/2.26%, while PCR stood broadly stable ~49%. Collection efficiency stood at 101% in 1QFY22, which improved further in Jul’21. Total loans restructured during 1QFY22 stood at INR6.58b, while the total structured book stands at INR12.65b (3.6% of gross advances).

Highlights from the management commentary

* Total ECLGS disbursements stood at INR8.7b, of which INR3b was made over 1QFY22.

* Around 20% of the ONAN pool has been upgraded, while 50% has slipped.

Valuation and view

AUBANK reported a strong performance with a 25% earnings beat, led by robust NII and controlled provisions. On the business front, Retail deposit mix continues to improve, even as the second COVID wave is affecting loan growth trends. We expect loan growth to revive sharply once the situation normalizes. The bank reported a stable asset quality in a challenging quarter.

Collection efficiency has shown higher buoyancy levels. Though the restructured book rose to 3.6%, the secured nature of loans and adequate collateral will enable controlled LGDs. We increase our FY22E/FY23E earnings estimate by ~8%/~11%, and expect a RoA/RoE of 1.9%/17.6% in FY23E. We value the stock at INR1,400 (5x FY23E BV) and maintain our Buy rating.

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