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PPoP in line; asset quality improves

One-off charges related to the merger hurt reported earnings

* AU Small Finance Bank (AUBANK) reported a PAT of INR3.7b in 4QFY24 (down 13% YoY), due to the stamp duty and other transaction charges related to the merger with Fincare SFB. AUBANK’s NII grew 10% YoY to INR13.37b (3% miss), while NIM contracted 40bp QoQ to 5.1%.

* PPoP grew 16% YoY to INR6.6b (in line) even as opex increased 26% YoY (4% above our estimate). C/I ratio thus increased to 65% from 63% in 3QFY24.

* Advances grew 25% YoY (~10% QoQ), led by growth in both retail and wholesale books. Deposits reported a healthy 26% YoY (8.8% QoQ) growth. C/D ratio was comfortable at 83.9% during the quarter.

* GNPA/NNPA improved 31bp/13bp QoQ to 1.67%/0.55%. Credit costs moderated to 0.47%. PCR increased 164bp QoQ to 67.6% in 4QFY24.

* We raise our FY25E/FY26E EPS by 4-5% and estimate FY26 RoA/RoE at 1.7%/15.8%. Reiterate BUY with a TP of INR735 (based on 2.7x FY26E BV).

Business growth healthy; margin contracted 40bp QoQ

*  AUBANK reported a 4QFY24 PAT of INR3.71b (13% YoY decline). Provisions declined 17% QoQ to INR1.33b (19% lower than MOFSLe); however, the one-off charges towards stamp duty and other transaction-related expenses of INR570m (net of tax) impacted net earnings adversely.

* Other income jumped 67% YoY to INR5.56b (17% beat) even as treasury gains were muted at INR70m. PPoP thus grew 16% YoY to INR6.6b (in line). Margin contracted 40bp QoQ to 5.1%, and management expects the cost of funds to increase 40-45bp in FY25. Therefore, NIM will remain under watch.

* Opex grew 26% YoY (up 9.9% QoQ) as the bank continued to invest in building the franchise. Total income grew 22% YoY (up 6.7% QoQ), leading to a 194bp QoQ increase in the cost-to-income ratio to 65%.

* Advances grew 25% YoY (~10% QoQ), led by growth in both retail and wholesale books. Yield on advances remained stable at 13.2%; however, the incremental disbursement yield has improved 46bp YTD.

* Deposits grew at a healthy 26% YoY (8.8% QoQ), led by strong traction in CASA deposits. CASA mix, thus, remained stable at 33%. The cost of funds rose 8bp QoQ to 6.98%.

* GNPA/NNPA improved 31bp/13bp QoQ to 1.67%/0.55%. Credit costs moderated to 0.47%. PCR increased 164bp QoQ to 67.6% in 4QFY24.

* The outstanding restructured loans declined to INR4.4b (0.6% of loans vs. 0.7% in 3QFY24). The bank has additional INR700m of provisions against standard restructured assets, along with INR410m of floating provisions.

Highlights from the management commentary

* The bank’s RoA is likely to be ~1.8% by FY27, led by improvements in: 1) operating leverage and 2) asset mix towards high-margin businesses.

* On a pro-forma basis, the microfinance business accounted for 8.3% of the merged loan portfolio as of 4QFY24. Over the next three years, AUBANK expects the MFI business to be ~10% of the loan portfolio.

* The bank will provide a credit cost of 2.5-3.0% p.a. on the MFI business every year. Any unutilized portion of this credit cost, in any year, shall be used to create a countercyclical buffer for the MFI.

Valuation and view: Reiterate BUY with a TP of INR735

AUBANK reported a mixed quarter as stamp duty and other transaction charges related to the merger with Fincare SFB dragged earnings even as PPoP stood in line. Margins continued to compress further as the cost of funds rose 8bp QoQ, while the disbursement yield remained broadly unchanged. On the business front, disbursement growth was healthy, led by both retail and commercial asset books. The traction in deposits also stood healthy. The asset quality improved, enabling a moderation in provisioning expenses while the bank further carried floating provisions of INR410m. We raise our FY25E/FY26E EPS by 4-5% and estimate the operating performance to improve gradually, thus resulting in an FY26 RoA/RoE of 1.7%/15.8%. Reiterate BUY with a TP of INR735 (based on 2.7x FY26E BV).

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