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AU SFB maintained its growth acceleration in 4Q which, coupled with better CoF, led to further margin expansion. This, along with improving asset quality and thus lower credit cost, led to a ~9% earnings beat, with Rs8.3bn PAT/1.8% RoA. However, cost-to-income remains elevated at 59%, as AU SFB transitions into a retail-heavy ‘Universal Bank’. Overall asset quality is trending well, with GNPA ratio steadily moderating to 2%, benefiting from contained slippage and strong credit growth. However, specific PCR remains at sub-par levels of 64%, which is slightly disappointing. We believe the bank would also need to keep up its guard on the retail portfolio, including the VF and BB segments, which could be vulnerable to business disruption from the prolonged West-Asia conflict. We raise FY27E/28E earnings by 3% each and expect RoA to improve to 1.6-1.8% over FY27-29E. However, we retain REDUCE on AU SFB while we raise our TP by ~9% to Rs950 from Rs870, given expensive valuations (3x FY28E ABV) with no margin of safety amid the raging macro-uncertainties.

Growth accelerates, as do margins

AU SFB maintained strong momentum, at 22% AUM/25% YoY credit growth, driven by the wheels, BB, and corporate segments. Overall unsecured loan growth including Cards too is turning positive and should thus support margins. Deposit growth too improved, to 23%, while CASA remains low at 28.4%. However, the bank managed to see improvement in CoF, benefiting from the earlier deposit rate cuts, which coupled with better investment yields led to a 26bps QoQ jump in NIM to 5.96%. The bank plans to grow sustainably at 2–2.5x nominal GDP growth, while leveraging AI-led transformation to enhance customer experience and productivity, and hence drive in operating leverage

Asset quality improves further, albeit lower specific PCR an irritant

Fresh slippage further moderated to Rs6.6bn/2.5% of loans, given the easing stress in unsecured loans and seasonal recovery in secured assets. Within unsecured retail loans, the management indicated that incremental stress in the MFI portfolio is easing and should thus drive down slippage further. However, overall specific PCR remains sub-par at 64%, which is slightly disappointing. We believe that the bank needs to keep up its guard on its retail portfolio, including the VF and BB segments, which could be vulnerable to business disruption from a prolonged West-Asia conflict

We retain REDUCE while raising our TP to Rs950

We raise FY27E/28E earnings by 3% and expect the bank’s RoA to improve to 1.6-1.8% over FY27-29E. However, we retain REDUCE while raising our TP by 9% to Rs950, given expensive valuations (3x FY28E ABV) with no margin of safety amid raging macrouncertainties. Key risks to rating/estimates: faster-than-expected growth and margin/asset quality turnaround, coupled with lower operational burn in its transition into a ‘Universal Bank’.

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