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AU Small Finance Bank

In a short span of time, AU Small Finance Bank has registered significant growth across all major parameters and has consistently remained ahead of the curve thanks to its extensive understanding of the business cycle and customer segments. Its strategy involves building a granular, retail liabilities franchise with a major focus on technology. The bank’s stupendous financials in comparison to its peers continue to reward the shareholders. In addition, the company is progressing towards an enduring future as it aspires to become a universal bank in the foreseeable future which will unlock new opportunities for the bank.

Investment Rationale

Small is the new big: AU is India’s largest Small Finance Bank by asset size with its AUM rising at a remarkable 32.5% CAGR over FY18-21. To expand its presence, it is now focused on an omnichannel delivery model.

Superior financial performance: The bank has generated industry-leading returns by delivering a 3 year average ROE of 19.4%. In fact, it has consistently increased its profitability during the same period supported by growth in its Net Interest Income and a decline in the cost of funds.

Focus on becoming a tech-led bank: The 5 key pillars which constitute the foundation of the bank’s tech strategy involve Digital, Digitisation, Digital Marketing, Data & Analytics, and Infra & Security

Excellent Asset quality: The company has a stellar track record of maintaining healthy asset quality. Even during the pandemic, its Gross NPA remained well in control at 2% as of FY22.

Eyes Universal Banking status: The company aims to achieve a universal banking status in the near future, with the goal of serving all segments of the economy and enabling it to rapidly expand its loan portfolio.

Growing in the right direction: The bank competes with private peers by offering competitive interest rates on deposits, superior customer service, and product features, ultimately aiding it to attract deposits and improve the cost of funds.

Key Risks

Low CASA book: While the bank focuses on growing its CASA book, its CASA deposit base at 37% still remains lower than the banking sector average of 40-60%.

Attrition remains the key challenge: A significant cause of concern is the high attrition at the top management levels, triggered by the series of resignations in audit/risk functions in the recent past.

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