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Modest quarter

Lower provision supports earnings; margin declines sequentially

* AUBANK reported slightly higher earnings (+4%) as compared to our estimate, led by lower provisions. However, operating profit fell 9% YoY due to a weak treasury performance.

*  While advances growth was strong at 43% YoY, lower margin dragged NII growth to 35%. In 1QFY23, margin contracted by 40bp QoQ to 5.9%.

* GNPAs increased by 5% QoQ. However, the GNPA ratio improved marginally. NNPA ratio grew 6bp QoQ to 0.56%. PCR fell ~340bp to 71.7%.

* We cut our FY23/FY24 PAT estimate by ~3%/11% as we build in a lower margin of 5.9% (v/s 6% earlier) and higher OPEX due to sustained investments in building the franchise. We expect AUBANK to deliver 26% earnings CAGR over FY22-24 and RoA/RoE at 1.8%/18.3% in FY24. We maintain our Buy rating.

Healthy traction in deposits; net NPA ratio rises 6bp QoQ to 0.56%

* AUBANK reported a 32% YoY growth in PAT at INR2.7b. While growth was marginally higher than our estimates, it declined 23% QoQ.

* NII grew 35% YoY to INR9.8b (in line), supported by a 43% YoY growth in advances, but the same was partially offset by a 40bp QoQ decline in margin. Core fee income grew 210% YoY, but fell 16% QoQ.

* OPEX increased by 62% YoY as the bank continues to invest in building the franchise. The C/I ratio stood elevated at 65%. In the long run, the bank’s endeavor is to pare it down to 50%. PPOP declined by 18% YoY to INR3.9b due to a weak treasury performance.

* Total AUM grew 37% YoY and 5% QoQ to INR502b, led by healthy disbursements across most segments. On a sequential basis, this was well below the growth clocked in the last couple of quarters.

* Total deposits grew 48% YoY to ~INR546b, with SA growing 135% to INR190b. The CASA ratio stood at 39% v/s 37% in 4QFY22.

* Absolute GNPAs increased by 5% QoQ. However, the headline asset quality ratio improved marginally by 2bp to 1.96% due to robust growth in advances. NNPA ratio increased by 6bp QoQ to 0.56%. PCR ratio decreased by ~340bp to 71.7%.

* Outstanding s restructured portfolio stood at INR10.4b, down 2.1% of advances (v/s 2.5% in 4QY22). The bank is carrying provisions of INR1.7b (16%) on the restructured book.

Highlights from the management commentary

* The bank is focused on building a tech-led robust Retail franchise.

* Guidance: The management guided at a broad-based growth of 30% in advances on a sustainable basis, with a similar asset mix.

* Around 26% of the loan book is at a floating rate as the book is of a shorter tenor and the yield is higher.

Valuation and view

AUBANK reported a moderate performance in 1QFY23, with a contraction in margin and a marginal increase in the NNPA ratio. While lower provisions supported earnings, PCR contracted by ~340bp QoQ to 72%. On the business front, growth in advances was strong at 43% YoY. However, the sequential trend was soft compared to the past few quarters. Traction in deposits remains healthy, especially savings account deposits. The bank carries contingent reserves of INR1.44b (29bp of loans), which, coupled with 16% coverage on restructured assets, provides comfort. We cut our FY23/FY24 PAT estimate by ~3%/11% as we build in a lower margin of 5.9% (from 6% earlier) and higher OPEX, due to sustained investments in building the franchise. We estimate AUBANK to deliver 26% earnings CAGR over FY22-24 and RoA/RoE at 1.8%/18.3% in FY24. We maintain our Buy rating with a TP of INR680 per share (4x FY24E BV).

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