Buy AU Small Finance Bank Ltd for the Target Rs.875 by Motilal Oswal Financial Services Ltd
Other income aid earnings; Credit cost guidance raised 10-15bp
Margin contracts 38bp QoQ
* AU Small Finance Bank (AUBANK) reported a 1QFY26 PAT of INR5.81b (5% beat; up 15% QoQ) amid robust other income and controlled opex.
* NII contracted 2.4% QoQ to INR20.5b (up 6.5% YoY, 4% miss on MOFSLe), impacted by a sharp 38bp QoQ NIM contraction to 5.4%, driven by loan repricing and an adverse asset mix as the share of high-yielding MFI and cards declined.
* PPoP grew 37.9% YoY/ 1.5% QoQ to INR13.1b (7% beat) amid better other income (led by healthy treasury gains). Opex declined 1.2% QoQ (5% lower than MOFSLe). The C/I ratio, thus, declined 69bp QoQ to 54%.
* Provisions stood higher at INR5.3b (9% higher than MOFSLe, down 16% QoQ), amid higher credit costs in the south-based mortgage book and the MFI segment.
* Business growth was healthy, with advances growing 22.5% YoY/ 2.6% QoQ to INR1.1t; deposits also stood strong at 31.3% YoY/ 2.8% QoQ.
* Slippages stood higher at INR10.3b vs INR8.9b in 4QFY25. The GNPA/NNPA ratio increased 19bp/14bp QoQ to 2.47%/0.88%. PCR declined to 64.7%.
* We cut our earnings estimate by 0.7%/3.8% for FY26/27 and project FY27E RoA/RoE of 1.7%/18.3%.
* Following a sharp recent outperformance, we see limited near-term catalysts for the stock. However, we believe that AUBANK has the potential to emerge as a promising franchise over the medium term, especially after it secures the Universal Bank license. We reiterate a BUY rating with a TP of INR875 (based on 3.1x FY27E BV).
Growth outlook healthy; slippages increase QoQ
* AUBANK reported 1QFY26 PAT of INR5.8b (5% beat on MOFSLe, up 15.3% QoQ), amid better other income and lower opex. We expect FY26 earnings to grow 25.7% YoY to INR26.5b.
* NII declined 2.4% QoQ to INR20.5b (4% miss on MOFSLe) due to a sharp contraction in margins, led by loan repricing and a change in the asset mix.
* Provisions came in higher at INR5.3b (9% higher than MOFSLe) amid stress and collections in the south-based mortgage portfolio as well as in the MFI and cards portfolio. PCR declined to 64.7% vs 68.1% in 4QFY25.
* Other income came in strong at INR8.1b (strong beat of 11%, up 6.6% QoQ), driven by healthy fees as well as treasury gains of INR3b (INR1b in 4QFY25). Opex came in lower, marking a 1.2% QoQ decline to INR15.4b.
* Advances grew 22.5% YoY/ 2.6% QoQ, led by growth in retail secured assets as well as commercial banking, while inclusive banking and unsecured book declined sharply in 1Q. Deposits grew 31.3% YoY/ 2.8% QoQ to INR1.28t. CD ratio, thus, declined to 86% vs 86.2%. The CASA mix stood flat at 29.2%, while CoF declined 6bp QoQ to 7.08% in 1QFY26.
* Slippages stood at INR10.3b vs. INR8.9b in 4QFY25. The GNPA/NNPA ratio increased 19bp/14bp QoQ to 2.47%/0.88%, respectively. PCR declined to 64.7%.
Highlights from the management commentary
* Credit cost was marginally higher than internal estimates, due to lower collection efficiency in MFI and cards and some slippages in southern mortgages.
* The bank aims to grow at 2-2.5x of the nominal GDP. The normalization of the unsecured portfolio may take time; however, the core momentum remains intact.
* The bank has revised its FY26 credit cost guidance to 1% (up 10-15bp) based on total assets and is targeting an RoA of 1.8% by FY27E.
* Full NIM recovery is expected by FY27E, with improvement anticipated to begin from 3QFY26 onwards.
* The MFI portfolio is expected to stabilize from 2Q, with 5% growth targeted for FY26E. 100% CGFMU coverage in the MFI book by FY26-end should help contain credit costs.
* Mortgages have posted a 15% CAGR over the past three years, with operational gaps now largely addressed. The bank targets 18% YoY growth for the current year, improving to 20% in the upcoming years.
Valuation and view: Reiterate BUY with revised TP of INR875
AUBANK reported a mixed quarter, with net earnings beating estimates, while provisions stood higher and margins contracted 38bp QoQ. Treasury income and controlled opex remain the key earnings drivers. Margin pressures are likely to continue in the near term, with 2H recouping some of this loss. On the business front, both advances and deposits grew at a healthy rate, and we expect AUBANK to maintain its growth leadership in the sector. Asset quality saw some deterioration amid stress in the MFI and the south-based mortgage portfolio, prompting management to raise its FY26 credit cost guidance by 10-15bp. We cut our earnings estimate by 0.7%/3.8% for FY26/27 and project FY27E RoA/RoE of 1.7%/18.3%. After a sharp recent outperformance, we see limited near-term catalysts for the stock. However, we believe that AUBANK has the potential to emerge as a promising franchise over the medium term, especially after it secures the Universal Bank license. We reiterate a BUY rating with a TP of INR875 (based on 3.1x FY27E BV).
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
