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Lower credit cost and early signs of yield improvement Financial and valuation summary

AUBANK reported above estimate numbers primarily to improvement in asset quality. NII for the quarter came in line at Rs13.4bn (CentrumE – Rs13.7bn). Further, noninterest income witnessed ~24% QoQ jump, thanks to pick up in business momentum. However, higher opex led to marginally lower PPoP at Rs6.6bn (CentrumE – 6.9bn). Resultantly, CTI for the quarter was sequentially higher at 64.9% vs. 63.0% in 3QFY24. However, credit cost for the quarter was lower at Rs1,325mn vs. Rs1,589mn in 3QFY24 which was better than our expectations. GNPA came in at 1.67% which was lower by 31bps QoQ, NNPA at 0.55% also lower by 9 bps on sequential basis thanks to collection momentum. Therefore, inspite the bank booked amalgamation expenses as exceptional item worth Rs768mn the PAT was broadly in line our estimates of Rs3.7bn. CRAR came in at 20.06% vs. 20.82% as of 3QFY24. We maintain our ADD recommendation for the stock. We roll forward to FY26 from 1HFY26 and value AUBANK at 3.5x ABVE for FY26E, resulting in a TP of Rs.884

Sharp Increase in CTI ratio leads to lower than expected PPoP

AUBANK posted robust +24% fund based income to Rs28.3bn vs. our estimates of 28.7bn. However, CoF (calc.) for the quarter declined sequentially by ~30 bps and came at 7.1%. On opex front, AUBANK witnessed a sharp increase with CTI print registering at 64.9% vs. 63% in 3QFY24. Resultantly, PPoP growth was lower at 16%.

Lower credit cost aids earnings

Slippages for the quarter came in higher at Rs3.0n (~1.75% of gross advances on an annualized basis). Further, AUBANK witnessed spike in provision expenses to Rs1,325mn (QoQ down 23 bps of AUM. Bank booked amalgamation expenses as exceptional item of Rs 768mn which resulting into PAT decline by -12.7% YoY/-1.2% QoQ. Resultantly, RoAA and RoAE (calc.) stood lower at 1.5% (-17bps QoQ) and 13.2% (-62bps QoQ), respectively.

Total deposits growth lead by bulk deposit

Total deposit portfolio stood at Rs871.8bn grew by 25.7%/8.8% YoY/QoQ. The deposit growth push by Bulk deposit (33.8% of Total deposit) by 40%/6% YoY/QoQ. CASA show healthy growth of 10% QoQ as compare to deposit at 9%. Further, advances grew by 25.2%/9.6% YoY/QoQ, stand at 732bn. Resulting, LDR maintain at 83.9% vs 83.3% in last quarter

Expensive valuations doesn’t provide room for disappointment

AUBANK has historically commanded premium valuation multiples, attributed to its sustained loan growth, impeccable asset quality, and appealing return ratios. Nevertheless, the current environment presents challenges for the bank, and execution is more important than ever. Our revised earnings estimates reflect an upward adjustment of approximately 6% and 3% for FY25, and FY26, respectively, to factor in recent improvement in business. We roll over to FY26 and assign a 3.5x to ABV to arrive at revised TP of Rs884 (earlier TP 809) and retain our ADD rating.

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