Reduce AU Small Finance Bank Ltd For Target Rs.955 By Elara Capital
Stronger undertones, valuations rich
AU Small Finance Bank (AUBANK IN) posted a strong Q3FY26 , driven by better revenue momentum (NII beat) and curtailed credit cost. Q3 was characterized by : a) better NIM outcomes (lower funding costs) , b) better loan growth and thus, improved NII growth (up 9% QoQ), c) higher opex (up 12% QoQ, as AUBANK continued to invest) feeding into flat core PPoP and d) better asset quality outcomes , with slippages restricted to ~2.6% (3.1% QoQ) and lower credit cost at sub -20bps (Q2FY26 at 30bps). AUBANK sounded confident of sustain ing momentum directionally , hinting at better FY27.
We believe Q3 performance had stronger undertones, and sustained momentum will be crucial to drive further re -rating. Given better -than -expected growth , we raise our target multiple to 2.7x ( from 2.3x) , which with roll forward to December ’27E leads to raised TP of INR 955 ( from INR 786). That said, the stock has rallied sharply (15% in p ast three months), suggesting most positives to be priced in and limited/no room for disappointment. Thus, we maintain Reduce.
Growth strong, NIMs better: NIM s improve d 25bps QoQ to ~5.7 % (higher than our estimates), given funding cost benefits and CRR benefits. AUBANK has further taken deposit rate actions , which essentially would cushion NIM impact and it is likely to have bottomed out ( sans any rate cuts). Loan growth outcomes were stronger , and with the unsecured segment likely to see traction hereon (QoQ growth has already picked up) , AUBANK anticipates better growth momentum with focus on the retail segment. Opex growth was higher (~12% QoQ), and we shall monitor this , especially as AUBANK transitions towards a universal bank license. Overall , AUBANK generated stated RoA ( annualized ) of 1.6%, and maintained 1.8% FY27 RoA target , with most of the benefit coming in credit cost , which , we believe , will remain volatile in the immediate term (await some more quarters for trends to be establish ed).
Asset quality outcomes better than anticipated, durability key: Slippages were curtailed at INR 7.9bn, at ~2.6 %, down ~13% QoQ , led by low er slippage trends across most segments. AUBANK sounded confident of sustain ing momentum, with further improvement in the unsecured segment, hinting at lower credit cost outcomes for the full year FY26 and sustained improvement in FY27. While a strong quarter, volatility in the past few quarters keeps us guarded and we await further datapoints to call this a trend.
Maintain Reduce with raised TP of INR 955: Q3FY26 was a better quarter with stronger undercurrents. Given better -than -expected growth, we raise our target multiple to 2.7x ( from 2.3x), and increase our TP to INR 955 ( from INR 786) as we roll forward to December ’27E. . The discussions may be hinged on growth outcome , durability of asset quality outcome and transition to a universal bank license . AUBANK has a reasonable step -down from earlier cycle RoA delivery and faces some headwinds as it grows into the big league, which will take time. The stock has recently rallied sharply , which renders risk -reward unfavorable as AUBANK wades through challenges given limited scope for maneuverability. Maintain Reduce.
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