Hold AU Small Finance Bank Ltd For Target Rs.650 - Emkay Global Financial Services
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Lower LLP drives earnings beat; managing cost pressures will be key challenge, hereon
* AU SFB reported higher-than-expected PAT at Rs3.9bn vs. our estimate of Rs3.6bn, mainly due to stable margins and lower LLP, partly offset by higher opex. Bank utilized contingent provisions to the tune of Rs0.3bn, with asset quality in better control as GNPA ratio improved QoQ to 1.8%.
* Credit growth remained strong at 38% YoY/7% QoQ, mainly led by strong corporate/SME growth and healthy retail growth. Growth in the wheels portfolio remains relatively moderate amid rising rates, while other retail segments report strong traction. Management has guided to balance growth with margins.
* Bank awaits guidelines from the RBI for applying for the universal banking license, while term-extension applications for MD & CEO Sanjay Agarwal and WTD Uttam Tibrewal are pending with the RBI. We largely retain our earnings estimates and expect RoA/RoE at 1.7%/15-17% over FY23-25E, as leverage improves.
* We retain our HOLD rating on the stock, with a TP of Rs650/share, given rich valuations. That said, we believe AU’s maneuvering the rising rate cycle without taking much impact on its otherwise-higher return ratios as well as raising compliance/governance standards will be closely tracked, as it prepares to apply for the Universal Banking Licence. Recent ECL norms too could be cumbersome for the bank, given its lower PCR and relatively-high risk model.
* Healthy growth continues; sustains margin pressure: AU SFB registered strong credit growth at 38% YoY/7% QoQ, owing to healthy traction in the corporate book. Retail growth too was decent, led by better growth in HL/BB, while wheels growth has been relatively slower, possibly hurt by rising rates. Deposit growth was healthy at 38% YoY/5% QoQ; however, CASA book de-grew by 5% due to cannibalization and, resultantly, CASA ratio declined by 4% to 38%. Despite a 14bps QoQ jump in CoF to 6%, the bank sustained its NIM at 6.2%, which could be incrementally challenging.
* Headline NPA ratios moderate; thus, Bank utilizes contingent buffer: Fresh slippages moderated to Rs2.3bn/2.3% of loans, while better recoveries/growth led to 9bps QoQ reduction in GNPA ratio to 1.8%. The restructured book too moderated QoQ, to 1.4% vs 1.7% in 2Q. With better handle on asset quality, Bank has utilized the contingent provision of Rs0.3bn in 3Q. That said, we believe macro & micro dislocation could cause some pressure on asset quality; thus, the bank needs to be well guarded for coping with any asset-quality hiccups.
* Outlook and valuations: We largely retain our earnings estimates and expect RoA/RoE at 1.7%/15-17% over FY23-25E, as leverage improves. That said, we believe AU’s maneuvering the rising rate cycle without taking much impact on its otherwise-higher return ratios as well as raising compliance/governance standards will be closely tracked, as it prepares to apply for the Universal Banking Licence. We retain HOLD with TP of Rs650/share, valuing the bank at 3.4x Dec-24E ABV. Key risks: Margin impact amid rising interest rate scenario; higher than expected NPA formation in wheels/SBL portfolio; key management attrition.
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