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Strong growth and asset quality to continue

Our view

AU Bank delivered an in-line operating performance (1% NII beat and 2% PPOP miss) on the expectations set by the pre-quarter disclosures. PAT beat of 6% and higher RoA/RoE of 2.2%/19% were driven by lower tax rate (presence of tax refund). All-time high disbursements of Rs103bn (up 26% qoq and 39% yoy) were driven by improved demand, expanding distribution and strengthening competitive position across product segments of Wheels, SBL, Affordable HL, Business Banking and Agri SME lending. Focused efforts towards CASA acquisition and deepening, addition of liability branches and increased investments on digital initiatives (credit cards, QR code and video banking) and brand campaign is underpinning strong growth in granular deposits. However, these franchise investments have transitorily elevated the cost/income ratio

Even as incremental CoF remained low, the incremental lending spread declined on account of a material reduction in disbursement yield (new business had higher share of relatively low-yielding commercial loans and home loans). Notwithstanding the product mix dynamics and a largely fixed rate book (75% of adv.), the bank is confident about largely protecting its NIMs due to further scope to structurally bring down CoF and ability to raise lending rates if required.

Improvement in borrowers cash flows and swift recovery actions drove significant net reduction in GNPL yet again (from 2.6% to 1.9%). Ann. slippage ratio in Q4 FY22 was 1.7% v/s 2.3-2.5% in preceding two quarters. NPL reduction was driven by collections and security enforcement, and loan write-off remains marginal. With the intent of building higher buffers on balance sheet on an ongoing basis, the bank strengthened its provisioning policy for GNPL. PCR was raised to 75% and NNPL was brought down to 0.5% by consuming a part of contingent provisions (remaining balance at 35 bps of adv.). The bank also created a floating provision of Rs0.4bn. Net credit cost without considering the change in provisioning policy was benign at 40 bps (v/s 60 bps in Q3). Repayment trends in both OTR book (2.5% of adv.) and ECLGS portfolio (1.8% of adv.) is within bank’s comfort

We estimate strong growth and asset quality to continue for AU Bank. Sustained intense franchise investments would likely augment long-term growth and profitability prospects of the bank but would cap RoA expansion in near-term. We have raised earnings and ABV estimates on higher growth and lower Net NPLs (provisioning policy change). Retain ADD rating with an increased 12m PT of Rs1505. Stock trades at 4.2x FY24 P/ABV.

KEY CON-CALL HIGHLIGHTS

Asset & Liability Growth

If not for any disruptions, the bank expects asset growth to be robust like pre-Covid times in next couple of years – management believes that 25-30% asset growth and 30-35% deposits growth is probable in FY23.

Growth to be led by all products, but Management most excited about Wheels (believes can grow at 25%+ for next 5 years), Affordable HL (small base and long-term opportunity) and Commercial Banking (lending to SME and MSMEs with improving competitiveness).

In vintage loan products like Wheels and SBL and in new offerings like Cards and Merchant QR and even in liabilities other states are growing faster than Rajasthan – in bank’s view, UP could present the best growth opportunity in next 5-10 years.

85000+ vehicles were financed in Wheels business during Q4 FY22 – demand for LCV and PV has been stronger - the book has an ATS of Rs3lac with composition of 60% new vehicle, 38% used and refinance and the balance 2% being 2w,

Demand gradually coming back in SBL segment with Q4 disbursements stable yoy – the portfolio comprises 2lac+ MSMEs.

Affordable HL witnessing strong demand – the portfolio represents 27000+ units financed – bulk of the book eligible long-term low-cost NHB refinance.

Bank gaining market position Business Banking and Agri Banking which are granular portfolios – the commercial banking portfolio also eligible for low-cost refinance.

Strong CA and SA deposit growth driven by targeted efforts - 64% of SA customers acquired in FY22 active on AU 0101 app - 27% of CA customers acquired in FY22 active in internet and mobile banking.

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