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Strong growth, but asset quality disappoints

* AU SFB reported higher PAT of Rs1.7bn (vs. est. of Rs1.4bn) in Q4FY21, up 38% yoy, mainly due to higher PSLC fees and lower provisions. FY21 PAT stood high at Rs11.8bn with RoA at a high of 2.5%, including one-off gains from Aavas Finance stake sale in Q3.

* GNPA ratio shot up to 4.2% (3.3% pro forma in Q3) of which <90 DPD pool is 1.5% (Once NPA – ONAN pool). Nearly 62% of this ONAN pool remains in 60-90 DPD, which could be at higher risk due to disruption related to the second Covid-19 wave. Lower specific PCR at 60% and contingent provisioning buffer at Rs0.7bn (0.2% of AUM) are also irritants.

* AU SFB scaled up its liability profile benefiting from general risk-averseness and focused approach, which should support slipping margins. We cut FY22 estimates by 10%, mainly factoring in higher NPAs/LLP, but raise FY23E by 5%. We expect the bank to clock healthy RoA of 1.8-2%/RoE of 15-21% over FY22-24E as growth accelerates and LLP moderates.

* We believe elevated asset quality risk amid the second Covid-19 wave, high dependence on the self-employed segment and recent news around resignation of internal auditor (possibly in normal course of business) could still weigh on the stock’s near-term performance. Factoring in the recent correction, we retain Hold/UW in EAP with a TP of Rs1,000, valuing at 4x FY23E ABV.

Credit growth accelerates; liability profile improves but more to go: Credit growth was strong at 22% yoy/14% qoq, led by strong traction in SBL portfolio. Disbursements rose 48% yoy to Rs74bn mainly due to return of normalcy. The bank saw strong deposit growth of 21% qoq/37% yoy, led by strong CASA and Retail TD growth. CASA ratio is now 23% (14% in Q4FY20), but the bank needs to accelerate it further. Reported NIM was stable at 5.4% (FY21) despite high slippages as it used provision of Rs380mn held for interest reversals on NPA.

Near-term focus remains on managing asset quality: GNPA ratio spiked to 4.2% (3.3% Proforma GNPA in Q3), including 90 DPD pool too remains moderate at 60%, while the contingent provision buffer is at a low of Rs0.7bn (0.2% of AUM). Management claims that lower PCR is mainly due to its otherwise lower LGDs in wheels/SBL portfolios at around <40%/30%.

Outlook and valuations: FY21 was a roller-coaster year and has tested the relatively new bank. The stock has seen correction post sharp run-up to QIP in Feb’21, due to rising asset quality risk. We cut FY22 earnings estimates by 10% due to higher LLP but raise FY23 estimates by 5%, factoring in better growth/moderation in LLP as the impact of Covid-19 normalizes. However, factoring in recent capital raise at premium, our FY23 ABV estimates have slightly inched up (to Rs250), while we cut our target multiple to 4x (v/s 4.2x). Retain Hold/UW in EAP with a TP of Rs1,000. Key risks to our call are slowdown in CASA momentum and high NPA formation, mainly in the Wheels/SBL portfolio amid the second Covid-19 wave.

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