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Earnings beat, but asset quality slips slightly

AU SFB has, after a miss in 4Q, now reported a 10% beat on PAT at Rs5bn/on RoA at 1.7%, mainly bolstered by healthy NIMs and lower opex. However, seasonal stress, including some effect of the elections in the MFI portfolio coupled with continued delinquencies in Cards, led to higher slippages at 3.5% of loans/LLP at 1.3% of loans. Overall credit growth was healthy, at 23% YoY/5% QoQ, and led to better LDR, which coupled with higher fresh disbursement yields and lower CoF helped AU report strong NIMs at 6%. The mgmt expects merged-bank NIMs to moderate to 5.5-5.8% for full year, as cost catch-up continues. However, better cost-to-income ratio and fees should help AU report RoAs at ~1.6% in FY25E, with an upward bias. We expect the merged bank to report RoA of 1.6% over FY25-26E, gradually improving thereafter to 1.7% by FY27E, subject to no major growth/asset-quality hiccups. We retain REDUCE on AU SFB as we anticipate some merger-induced disruption, but revise up our TP to Rs625/sh (from Rs600), rolling forward on 2.4x Jun-26E ABV.

Healthy growth, along with improvement in margins

AU SFB clocked a healthy credit growth of 23% YoY/5% QoQ (on merged basis), driven by strong performance in the Wheels segment (15% YoY/8% QoQ), along with sustained momentum in the mortgage book, and uptick in gold loans benefiting from Fincare’s tech and strategy. However, the management made a calibrated move to keep the deposit growth muted QoQ, as it first wanted to consume the residual surplus liquidity in the form of Fincare’s deposits/borrowings while also cutting its SA rate, to protect margins. This, coupled with higher fresh disbursement yields and lower CoF, helped the bank report healthy NIMs at 6%. The management reiterated that it would focus on branch banking for building deposits (especially current deposits) and expanding the credit card and MFI business (though not more than 10% of the overall book) presence in the southern market. Going forward, the bank expects merged-bank NIMs to moderate to 5.7-5.8% for full year, as cost catch-up continues.

Asset quality slips, as stress rises in MFI and Cards

Fresh slippages were slightly higher at Rs5.4bn/3% of loans due to seasonal stress, including some effect of the elections in the MFI portfolio coupled with continued delinquencies in cards. These were partly offset by the higher recoveries and write-offs which led to increase in GNPA/NNPA ratios to 1.8%/0.6%, respectively. The Covidinduced restructured book has declined to Rs3.9bn/0.4% of gross advances, during the quarter. The bank has created a contingency buffer of Rs170mn on its MFI portfolio, and plans to provide for a higher LLP of 2.5-3% p.a. on the MFI business; any unused portion from this assigned range in any given year will be allocated toward creating a countercyclical buffer. Specific PCR stands low at 65% as of Q1FY25.

We retain REDUCE on AU SFB

We expect the merged bank to report RoA of 1.6% during FY25-26E, and then gradually improve to 1.7% by FY27E, subject to no major growth/asset-quality hiccups. We retain our REDUCE rating on the stock, anticipating some merger-induced disruption, but revise our TP upward to Rs625/sh, rolling on 2.4x Jun-26E ABV. The bank has taken an enabling resolution to raise capital, but does not plan to raise capital any time soon. Separately, the bank plans to apply for a ‘Universal Banking’ license in FY25.

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