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Delivers lower profitability with pressure on core NIMs, Opex and Credit Cost

AU SFB delivered a significant 14% miss on our PAT estimate, despite higher securitization income (change in accounting + larger quantum done in the quarter), on account of much higher-than-expected opex and credit cost. Reported NIM was flat qoq at 5.5% but included the higher securitization income, and the portfolio spread was lower by 30 bps sequentially with portfolio yield declining by 10 bps.

Bank’s AUM grew by 6.4% qoq/30% yoy while its Gross Adv. grew 4% qoq/20% yoy on higher impetus on securitization (overall securitized portfolio reached 11% of AUM). Stronger growth continued in lower-yielding loan product segments of Home Loans, Business Banking and Agri Finance. Deposits growth was sturdy at 5.8% qoq/31% yoy with renewed traction in SA deposits (up 7.5% qoq) and consistent healthy mobilization of Retail TDs. The rise in Cost of Funds was higher than preceding quarter at 20 bps and the CD ratio moderated to 83% with higher growth in deposits v/s on-BS loans

Other Income was 8% higher than estimate with strong growth in Loan Processing, TPD & Cross-sell and Credit Card fees. Non-employee opex growth remained elevated at 14% qoq/38% yoy. Besides investments in digital initiatives and wealth & transaction banking, Q3 FY24 had increased spend on Brand and marketing in the festive season. Credit cost increased to 90 bps on the back of higher NPL addition and write-offs, essentially in the Credit Cards business. RoA/RoE stood at multi-quarter low of 1.5%/12.5%.

Management expects growth to stay strong and credit cost to normalize

With focus on becoming deposits-led asset franchise, the bank has calibrated loan growth to match deposits growth which is reflected in sharp moderation in CD ratio in the recent quarters. Management admitted to challenges around raising lending rates across products due to competition, and hence the pressure on portfolio spread. Credit Card delinquencies are coming through on account of seasoning of the portfolio and the credit cost is normalizing in other loan products, as per the Bank. A sizeable portion of Q3 FY24 credit cost was contributed by Credit Cards with the Bank providing 100% on 120+ dpd loans. During the quarter, elections in AU SFB’s large markets of RJ and MP impacted NPL resolutions/recoveries in secured products with constraints on security enforcements. The bank has given a Credit Cost outlook of ~50 bps on nonCard book and 6-7% on Cards portfolio.

Cut earnings by 5-6%, downgrade to Neutral

Our earnings estimates for FY25/26 undergo a material cut of 5-6% and we expect a slower RoE progression than thought earlier. Reduction in the earning has largely come from pruning of NIM outlook, assumption of sustained franchise investments and likely elevation of credit cost from the unsecured book. In the context of revised (pruned) growth and RoE delivery, the current valuation of the bank at 17x PE and 2.7x PABV doesn’t offer any significant upside in coming 6-12 months. Hence, we downgrade our stock rating to Neutral from ADD with a 12m PT of Rs780 after rolling over target multiple to FY26. We haven’t factored the Fincare SFB merger and would do so after receipt of all approvals and more clarity on the merged financials.

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