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Business momentum steady; remain watchful of margins

Earnings to clock 28% CAGR over FY23-25E v/s 37% CAGR over FY18-23

*AUBANK’s stock has delivered healthy returns of >40% over the past two months, particularly after the RBI approved the re-appointment of Mr. Sanjay Agarwal as MD and CEO of the bank.

* Although we see a robust growth opportunity for the bank in the long term and believe the stock can be a compounder if the bank continues to execute well, near-term growth opportunities are fairly priced in after the recent outperformance.

* Loan growth is likely to remain steady at a 28% CAGR, aided by sustained traction in key business verticals (Vehicle & MSME), along with a scale-up in new lending segments such as Housing Loans, Credit Cards, etc.

* However, given the thrust on physical expansion, continued tech investments and potential NIM compression, we estimate AUBANK to deliver RoA of 1.8-1.9% in FY24/25. We expect a 28% earnings CAGR over FY23-25E v/s 37% over FY18-23.

* While the management has shown strong execution prowess and we believe the long-term growth story remains intact, we find the current risk-reward unattractive after the recent stock performance. We, thus, downgrade the rating to Neutral with a TP of INR830 (premised on 3.7x FY25E BV; 24x FY25E EPS).

FY23 loan growth moderated; estimate 28% CAGR over FY23-25 After reporting healthy loan growth in the past many years, AUBANK has witnessed a gradual moderation. The bank reported 27% loan growth in FY23 v/s a CAGR of 48% over FY17-22. The management focuses on strengthening the key business lines of Vehicle Loans and MSME Loans, along with scaling up the new segments such as Housing Loans, Gold Loans, Consumer Durable Financing, and Credit Cards. Further, the credit deposit ratio is healthy at ~84%, and with a high competitive intensity on raising incremental deposits, we expect loan growth to be in sync with deposit growth. We thus estimate loan growth to remain steady at a ~28% CAGR over FY23-25.

Rising cost of funds to weigh on margins AUBANK is focusing on diversifying the loan book, with robust momentum in segments such as Home Loans. The wholesale book has also grown at a faster pace. Moreover, a higher mix of fixed-rate book has kept the yields under pressure. We note that the yield on AUM has been stagnant at ~13.3-13.4% over the past 4-5 quarters. Further, the cost of funds has witnessed a constant increase, up ~60bp in the past one year. We note that of the total increase in the funding cost over past one year, more than half of it happened in 4QFY23. We believe that liabilities will continue to re-price at a faster pace and outpace the lending yields; hence, we remain watchful of margins.

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