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RBI grants in-principle approval for transition to Universal Bank

Endorses franchise credentials; transition unlocks key to long-term growth

RBI has granted in-principle approval to AU SFB (AUBANK) for its transition into a Universal Bank, marking a significant milestone in the bank’s journey. This approval follows the revised guidelines issued in Apr’24, which established a voluntary transition framework for eligible SFBs that meet capital norms, demonstrate five years of consistent operational performance, and successfully meet RBI's due diligence criteria. Having started operations in 2017, AUBANK became the first SFB to formally apply under this route. This transition underscores the regulator’s confidence in AU’s governance, execution track record, and institutional maturity.

• The universal bank license enhances brand positioning and is expected to help narrow the gap in deposit rates that AUBANK offers vs peers, thereby reducing the cost of funds and improving CASA mobilization over time.
• The license removes limitations on loan ticket sizes and borrower exposure, opening new avenues of growth. However, the bank does not consider this a near-term focus area. In the medium term, this will enable AUBANK to scale up its presence in largerticket retail, SME, and mid-corporate segments, thereby enhancing portfolio diversification and boosting capital efficiency.

Reiterate BUY with a TP of INR875; the RBI approval serves as a strong re-rating catalyst, improving growth visibility and investor appeal. Earnings recovery in earnings over 2H as credit cost subsides along with industry leading loan growth, a potential capital raise to support robust growth, and the RBI’s approval of CEO’s (Sanjay Agarwal) term renewal— due in Apr’26—are additional near-term catalysts that reinforce confidence in the bank’s operational capablities and long-term growth outlook.

Strengthening liability profile through better brand positioning

• One of the most powerful benefits of AUBANK obtaining a full license will be the strengthening and transformation of its liability franchise. As an SFB, AUBANK has consistently delivered strong balance sheet growth but has faced higher deposit rate burdens to attract growth, especially while competing with established private banks.
• As AU transitions into a Universal Bank, its perception among customers, corporates, and depositors is expected to shift meaningfully.
• Key benefits for the bank include: 1) Lower cost of funds, 2) Improved CASA ratio, 3) Better access to affluent and urban customers, 4) Broader liability product bundling, and 5) Improved cross-sell opportunities.

Granularity restrictions removed; credit growth to remain resilient

The universal banking license removes key regulatory constraints that earlier limited AUBANK’s ability to scale its advances book—particularly the requirement to maintain at least 50% of loans below INR2.5m and caps on exposure to individual/group borrowers. While AUBANK does not intend to make material nearterm changes to its credit strategy, the license offers significant long-term flexibility to tap into larger-ticket secured retail, SME, and mid-corporate lending. This shift opens avenues to diversify the portfolio, improve capital allocation, and enhance risk-adjusted returns. Importantly, AUBANK can now selectively target higher-rated borrowers without regulatory caps, allowing for more efficient credit growth. The change does not impact FY26 plans but acts as a strategic lever for future scalability and product expansion.

Transition to Universal Bank enables improved operational flexibility and offers long-term scalability

As a Universal Bank, AUBANK will benefit from significantly reduced regulatory constraints, thereby unlocking substantial headroom for growth, profitability, and franchise deepening. Other key benefits include: 1). Lower PSL mandate – PSL requirements decrease to 40% from the existing 60%. The bank can now reallocate capital towards more RoA-accretive segments like secured SME, mid-corporate, and higher ticket retail loans. 2). No restrictions on loan disbursement – With SFB-specific granularity and ticket size restrictions removed, AU can now target larger, better-rated borrowers within the overall exposure limits applicable to all commercial banks, enabling it to scale in segments like mid-market and supply chain finance. 3). Unlocking of Para banking – While AU was already offering third-party products like insurance and mutual funds, the universal bank status now allows broader participation in para-banking activities, including wealth management, structured products, and forex services, enabling stronger fee income growth.

Valuation and view: Reiterate BUY with TP of INR875

• The in-principle approval to transition into a Universal Bank catapults AUBANK into the big league and underscores RBI’s confidence in the bank’s business operations and governance standards. This transition will be critical in shaping the bank’s long-term trajectory, providing regulatory advantages over private banks and offering new avenues for growth through reduced requirements on regulatory compliance.
• The recovery in earnings over 2H as credit cost subsides along with industry leading loan growth, a potential capital raise to support robust growth, and the RBI’s approval for the CEO’s (Mr. Sanjay Agarwal) term renewal—due in Apr’26—are additional near-term catalysts that reinforce confidence in the bank’s operational capabilities and long-term growth outlook.
• During the 1Q results note, we reiterated our BUY rating on the stock with a TP of INR875, even as the bank delivered a 60% return over the prior quarter, as we awaited this approval and anticipated the franchise gaining strength in the coming years. We expect this transition to support overall growth and profitability outlook while significantly enhancing the bank’s profile with this coveted upgrade.

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