IGI Logo

Strong loan growth at 8% QoQ was offset by ~40bps QoQ NIM contraction resulting in 9% QoQ decline in AU Small Finance Bank’s (AU) Q1FY24 PAT to INR 3.8bn. NIM settled at 5.7% in Q1FY24 vs 6.1% in Q4FY23 due to 30bps QoQ increase in cost of deposits to 6.6% and flattish QoQ asset yields at 13.4%. Management indicated, while bulk of deposits were already repriced at higher rates as of Jun’23, cost of funds is likely to increase by ~10bps and put pressure on NIM in Q2FY24. Asset quality deteriorated marginally, Q1 being a seasonally weak quarter for collections, with GNPL increasing by 10bps QoQ to 1.8% in Q1FY24. RoA remained steady at 1.7% and we believe likely pressure on NIM in Q2FY24 would restrict further RoA expansion in the near term. Also, considering the sharp run-up in the stock price over past 3 months (up ~20%), we downgrade AU to HOLD (earlier: Buy) with the target price unchanged at INR 770.

Q1FY24 financial performance

While credit growth remained strong at 8% QoQ, NII growth stood at 3% QoQ due to ~40bps NIM contraction in Q1FY24. Other income fell 5% QoQ (due to absence of PSLC income & lower general banking fees), which kept net revenue growth sluggish at 1% QoQ. Operating expenses grew 4% QoQ, but lower revenue resulted in the cost-income ratio increasing to 65% in Q1FY24 (vs 63% in Q4FY23). As a result, PPoP declined by 4% QoQ. Lower credit cost (21bps in Q1FY24 vs 28bps in Q4FY23) was offset by tax normalisation (tax rate in Q1FY24 was at 25% vs 20% in Q4FY23). Overall, PAT declined by 9% QoQ and RoA settled at 1.7%.

NIM – a key monitorable

Bulk of deposit repricing at a higher rate during Q1FY24 led to ~30bps increase in cost of funds resulting in 40bps reduction in NIM to 5.7%. While the management has already initiated steps to improve asset yields (disbursement yield up 29bps QoQ), it also indicated that the balance deposit repricing in coming quarters would impact NIM by a maximum of 10bps.

Credit growth remained strong at 8% QoQ

Credit growth trajectory remained robust with gross advances growing 8% QoQ led by higher growth in vehicle (up 11% QoQ), home loan (10%), credit card (31%), business banking (11%) segments – while growth remained sluggish in SBL, NBFC and real estate financing. While the bank articulated its strategy of ‘deposit-led growth’, it remains equally confident of delivering 25- 30% credit growth in FY24.

To Read Complete Report & Disclaimer Click Here

or More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7 SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer