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Earnings in line, aided by other income; NIMs compress QoQ

Announces merger with Fincare SFB – Merger to be EPS/BV accretive

* AUBANK reported 17% YoY growth in net earnings (in line), aided by higher other income (up 72% YoY). PPoP thus grew 30% YoY (up 19% QoQ, 9% beat). Margins declined 22bp QoQ to 5.5%. Provisions came in higher at INR1.1b.

* Advances grew 24%YoY (2% QoQ), while deposits grew strongly at 30% YoY (9.3% QoQ). CASA deposits grew 4% YoY, while CASA mix stood at 33.9%.

* Absolute GNPAs/NNPAs increased 11%/10.8% QoQ. Thus, the headline GNPA/ NNPA ratios deteriorated 15bp/5bp QoQ to 1.91%/0.6%.

* In the first round of consolidation amongst SFBs, AUBANK announced a merger with Fincare SFB. The merger is EPS, BV, and RoA accretive and will enable AUBANK to diversify the loan book and gain access to ruraldominated MFI portfolio as the segment will form ~7.5% of loans. The bank will also benefit from improved geographical presence with strong foothold in Southern India, while the ongoing pressure on margins and compliance with sub-segmental PSL targets will also see some relief from the merger.

* We slightly lower our FY24E/25E estimates by 2.8%/2.0% as higher other income and controlled opex compensate for higher provisions and weak margins. We reiterate our Buy rating on the stock with a TP of INR780 (3.6x FY25E ABV).

Deposit growth steady; provisioning expenses increase sharply

* AUBANK reported 17% YoY growth in net earnings (up 4% QoQ, in line), aided by robust other income (up 72% YoY, 28% beat). However, provisions came in higher at INR1.1b vs. INR0.3b in 1QFY24.

* PPoP thus grew 30% YoY (up 19% QoQ, 9% beat). Margins contracted 22bp QoQ to 5.5% in 2QFY24 and the management expects margins to be at 5.5%-5.7% going forward. Core Other Income grew 69% YoY in 2QFY24, driven by healthy growth in disbursements, and increasing contribution of credit card & bancassurance income.

* Opex grew 23% YoY as the bank continues to invest in building the franchise. However, total income grew 25.8% YoY (7.2% QoQ), enabling 370bp QoQ moderation in C/I ratio to 61.3% in 2QFY24.

* Advances grew 24% YoY to INR642b (up 2% QoQ), led by a healthy 10% QoQ growth in the wholesale book. The yield on advances thus moderated to 13.3%, owing to changing business mix; however, the incremental disbursement yield improved 27bp QoQ (41bp during 1HFY24).

* Deposits grew 30% YoY/9% QoQ, led by CASA growth of 6% on a QoQ basis, while TDs grew 11% QoQ. CASA ratio thus moderated 110bp QoQ to 33.9%. Cost of funds rose 12bp QoQ to 6.70%.

* Absolute GNPAs/NNPAs increased 11%/10.8% QoQ and fresh slippages increased to INR3.5b (2.7% of loans). Thus, the headline GNPA/ NNPA ratios deteriorated 15bp/5bp QoQ to 1.91%/0.6%, partly affected by loan securitization of INR29.2b in 2QFY24. PCR ratio stood stable at ~69.1%.

* O/s restructured loans declined to INR5.1b (0.8% of loans vs. 1.0% in 1QFY24). The bank is carrying provisions of INR0.88b on its restructured book.

Highlights from the management commentary

* The bank has come a long way, evolving from an NBFC to becoming the largest SFB in the country. Fincare has experienced remarkable growth, positively impacting the life of millions of people at the bottom of pyramid. Both entities share core values, a common goal, and a shared vision.

* Fincare will help improve the Pan-India network; 49% of Fincare branches are located in the South where AUBANK has limited presence. Fincare has healthy presence in the states of UP and Bihar.

* The C/I ratio stood at 61%, indicating the bank’s continued focus on efficiency. The bank is expected to maintain the same C/I ratio as in FY23.

* The credit cost, which previously ranged from 80bp-1%, is anticipated to decrease further, stabilizing within the range of 50-60bp in the long run.

Valuation and view

AUBANK reported a mixed quarter, aided by healthy deposits growth and higher other income. Asset quality deteriorated during the quarter, while margins continued to compress and now stands at the lower end of the guided range. On the business front, disbursement growth was healthy; however, higher securitization has affected the growth rate of on-balance sheet advances. Provisioning coverage remains stable, while the bank carries tiny contingent reserves of ~INR70m. We cut our earnings estimates in FY24E/FY25E by 2.8%/2.0% as higher other income and controlled opex compensate for higher provisions and weak margins. We estimate RoA/RoE to reach 1.8%/16.8% by FY25E. We reiterate our Buy rating on the stock with a TP of INR780 (3.6x FY25E ABV).

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