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Low opex drives earnings beat; credit cost stays high

NIMs improve sharply benefitting from merger with Fincare SFB

* AUBANK reported 1QFY25 PAT of INR5.02b, significantly ahead of our estimates, led by controlled opex. NII stood at INR19.2b (in line), while NIMs improved 90bp QoQ to 6%, benefitting from the merger with Fincare SFB.

* PPoP stood at INR9.9b (22% beat) as opex came in 13% lower than our estimate. C/I ratio thus declined sharply to 59.9% vs. 64.9% in 4QFY24.

* Advances, adjusted for the merger, grew 5% QoQ, led by both retail and wholesale. Deposits, adjusted for the merger, remained broadly flat QoQ, as the bank used a calibrated approach to stay away from high-cost deposits. As a result, the overall CD ratio jumped to 92% in 1QFY25.

* GNPA/NNPA ratios increased by 11bp/8bp QoQ to 1.78%/0.63%. Credit costs moderated to 0.29%. PCR improved to 84% (including TWO).

* We tweak our estimates slightly and estimate the bank to deliver RoA/RoE of 1.71%/15.5% by FY26. Reiterate BUY with a TP of INR735 (based on 2.7x FY26E BV).

Earnings outlook healthy; NIM, C/I guidance remains unchanged

* AUBANK reported a healthy earnings beat at INR5.02b, aided by lower opex even as NII stood in line. We believe that this marks a good start to the first quarter of merged earnings, where yields improved and cost decreased. The improved geographical diversification can spur healthy growth in the coming quarters.

* Other income stood at INR5.5b (6% below MOFSLe), while treasury gains were healthy. Lower opex, however, resulted in a 22% beat in PPoP at INR9.9b. C/I ratio thus declined to 59.9%, though the bank guides for a C/I ratio of 61-63% going forward.

* NIMs increased sharply to 6%, backed by healthy improvements in yields and flat CoF. The management guides for NIMs of 5.5% (+/-15bp), with stable yields, but funding cost will increase slightly.

* Advances, adjusted for the merger, grew 5% QoQ, led by both retail and wholesale. Yield on advances improved by 91bp QoQ to 14.4%, with incremental disbursement yield up 174bp QoQ as the bank now has highyielding assets like Gold and MFI in its portfolio.

* Deposits, adjusted for the merger impact, stood broadly flat QoQ, while CASA mix was also flat at 33%. The cost of funds rose 4bp QoQ to 7.03%.

*  GNPA/NNPA ratios rose 11bp/8bp QoQ to 1.78%/0.63%. Outstanding restructured loans declined to INR3.6b (0.4% of loans vs. 0.6% in 4QFY24). The bank has additional INR640m of provisions for standard restructured assets, along with INR170m provisions for the MFI portfolio.

Highlights from the management commentary

* The bank will soon apply for a universal bank license as it has received the board approval.

* The main challenge lies in cost, not deposits. The bank can incrementally build INR250b of deposits, though this may come at higher costs.

* The bank has a healthy RoA outlook and aims to maintain its RoA at 1.6% over FY25. NIMs are expected to be in the 5.5% range (+/- 15bp).

* The bank has 93% coverage on its overall MFI book, with total provisions (excluding write-offs) of INR670m, accounting for 70%.

Valuation and view

AUBANK reported a healthy start to a merged quarter, which was characterized by improvement in yields and flat CoF as the bank refrained from growing high-cost deposits and shed excess liquidity on the balance sheet. Margins for the merged entity surprised positively as the bank witnessed sharp improvements in yields, while CoF was largely under control. On the business front, disbursements in both retail as well as corporate turned out to be good, while disbursement yields were much better. Asset quality deteriorated slightly, resulting in slightly higher-thanestimated provisions, though the management kept credit cost guidance unchanged at 1.1%. We expect the merger to drive business growth, with the expansion in a new geography along with improved product offerings. The conversion to a universal bank will further enable healthy growth and strengthen market position. We largely maintain our estimates, resulting in FY26E RoA/RoE of 1.7%/ 15.5%. Reiterate BUY with a TP of INR735 (based on 2.7x FY26E BV).

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