Reduce AU Small Finance Bank Ltd for the Target Rs 950 by Emkay Global Financial Services Ltd
AU SFB maintained its strong growth momentum in 1QFY27, reporting PAT of Rs7.96bn (+37% yoy/-4.3% qoq) with ROA of 1.7%, driven by lower-thanexpected credit cost at 109bps vs estimate of 123bps. AUM grew 23% yoy (3% qoq), led by healthy traction in secured lending and a recovery in the unsecured portfolio. Asset quality was broadly stable, with GNPA/NNPA at 2.10%/0.76% (vs. 2.03%/0.74% in 4QFY26); the slippage ratio rose modestly to 2.9% from 2.5% in 4Q but stayed well below FY25 levels. The cost-to-income ratio improved ~160bps qoq to 57.6%, reflecting operating leverage despite continued investments in distribution, technology, and branch expansion. The management remains comfortable with existing Stage 3 provisioning buffers to absorb the ECL transition, with a quantified assessment by 3QFY27, and reiterated confidence in achieving ~1.8% ROA over the next 6–9 months, supported by lower credit costs, improving operating leverage, and higher other income. We raise our FY27/29E earnings by 1-3% and expect ROA to improve to 1.7-1.8% over FY27-29E. We retain REDUCE with an unchanged Jun-27E TP of Rs950; at FY28E PABV of 2.7x, the stock appears priced to perfection amid a volatile macroeconomic environment.
Growth momentum sustained; margins normalize Business momentum remained robust, with AUM up 23% yoy (3% qoq), led by the secured portfolio (+25% yoy/+4% qoq) and a recovery in unsecured lending (+11% yoy/+5% qoq). The liability franchise also strengthened, with deposits and CASA growing 24% and 22% yoy, respectively, outpacing the industry on granular retail deposit mobilization. The management reiterated keeping the MFI portfolio below 10% of AUM (currently 5.2%). NIM moderated 7bps qoq to ~5.9% on yield normalization and marginally higher funding costs, though the management indicated funding costs have largely bottomed out and expects margins to be broadly stable on favorable portfolio mix. The bank also reiterated its aspiration of loan growth at 2–2.5x India's nominal GDP.
Asset quality remains resilient
Asset quality was broadly stable, with GNPA/NNPA at 2.10%/0.76% (vs 2.03%/0.74% in 4QFY26). While the slippage ratio inched up to 2.9% from 2.5% qoq on seasonal factors, the management highlighted improving unsecured slippages and stable secured asset quality, indicating no deterioration in underlying credit trends. The management remains comfortable with current Stage 3 provisioning buffers, with a definitive assessment of the ECL impact expected by end-3QFY27.
We retain REDUCE while maintaining TP of Rs950
We raise our FY27/28E earnings by 1-3% and expect ROA to improve to 1.7-1.8% over FY27-29E. We retain REDUCE with an unchanged Jun-27E TP of Rs 950; at FY28E PABV of 2.7x, the stock appears priced to perfection amid a volatile macroeconomic environment. Key risks: faster-than-expected growth, margin/asset quality turnaround, and lower operational burn in its transition to a ‘Universal Bank’.
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