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Steadfast growth; needs to shore up specific provision buffers

* AU SFB posted a slight earnings beat, with a PAT of Rs3bn (est: Rs2.9bn), mainly driven by strong NII growth (up 30% yoy), high core/PSLC fees and low provisions, partly offset by high opex as the bank continued to invest in franchise network/customer acquisition.

* Overall AUM growth was strong at 26% yoy/11% qoq, mainly led by strong traction in commercial banking, SBL and a pick-up in wheels. The CASA ratio was at a historical high of 39%, which, adjusting for lumpy govt mandate, would have been at 36%. NIM improved by 30bps qoq to 6.3% due to lower CoF, which it believes should settle around 6%.

* Fresh slippages were higher than expected at Rs2.5bn/3.3% of loans; however, higher recoveries/w-offs led to a 56bps qoq drop in the GNPA ratio to 2.6%. The restructuring pool was high at 3.1% of loans, with a relapse rate of 19% in the R-1 framework. Specific PCR improved a bit, but still remains low at 51%, in our view.

* We expect the bank to report healthy RoA/RoE of 1.9-2%/17%-21% over FY22-24E, led by strong growth/margins and moderating LLP. However, we believe AU SFB runs a high growth-risk model, and thus should strengthen its risk/compliance architecture and sustain counter-cyclical buffers, more so in light of its planned transition toward a universal bank. Retain Hold with a TP of Rs1,275 (valuing the bank at 4.5x Dec’23E ABV).

Strong growth, improving liability profile drive up margins: Credit growth (AUM) was healthy at 26% yoy/11% qoq, led by commercial banking, SBL and a pick-up in wheels. Demand for used vehicles remains strong, while it is expected to pick up soon for new vehicles as economic activity normalizes. The bank has distributed +100,000 credit cards and believes that the card business is a good customer acquisition strategy. The bank’s CASA ratio has inched up to a historical high of 39%, which, adjusting for lumpy govt mandate, would have been at 36%. NIM improved by 30bps qoq to 6.3% due to lower CoF, which it believes should settle around 6%.

High fresh NPAs; restructuring pool remains an irritant: Fresh slippages were higher than expected at Rs2.5bn/3.3% of loans; however, high recoveries/w-offs led to a 56bps qoq drop in the GNPA ratio to 2.6%. The restructuring pool was high at 3.1% of loans, with a relapse rate of 19% in R-1 framework. Specific PCR was moderate at 51%. The contingent provision buffer stood at Rs3bn (0.8% of AUM), which we believe the bank should retain as a countercyclical buffer even after the pandemic, given its relatively high-risk/return business model.

Outlook and valuations: We expect the bank to report healthy RoA/RoE of 1.9-2%/17%- 21% over FY22-24E, led by strong growth/margins and moderating LLP. However, we believe AU SFB runs a high growth-risk model, and thus should strengthen its risk/compliance architecture and sustain counter-cyclical buffers, more so in light of its planned transition toward a universal bank. Retain Hold with a TP of Rs1,275 (valuing the bank at 4.5x Dec’23E ABV). Key risks: slowdown in CASA momentum; high NPA formation (mainly in the Wheels/SBL portfolios); and key management attrition.

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