YES Securities recommended reduce rating on AU Small Finance Bank with a target price of Rs 700 in its research report dated July 24, 2020.
YES Securities' research report on AU Small Finance Bank
AU delivered a better-than-expected operating performance adjusted for the huge treasury income, gains on partial stake sale in Aavas and large covid provisions. PPOP was 15% higher versus our estimate. AUM growth moderated to 17% yoy, as disbursement were down 70% yoy. Wheels and NBFC book saw a notable qoq decline. While AUM IRR was stable and CoF witnessed a steep decline, NIM came-off sequentially due to decline in LDR, increase in BS liquidity and lower incremental yield on funds. Structurally, the deposit franchise is taking good shape with accelerated traction in SA and Retail TDs. Cost of funds fell 30 bps qoq, also supported by TLTRO opportunity. Core fees and operating expenses stood much below expectations primarily on substantially lower loan originations. Complete moratorium has been availed by 11% borrowers by value as on 30 June. Full EMI recovery improved to 67% in June from 53% in April. Collection efficiency was 90% in June including some arrears of preceding months being received. Total covid-related provisions stand at Rs2.8bn, near 1% of loan book. Though management expects collections to further improve in July-August, we believe delinquencies could spike as certain applications/occupations in retail portfolio may take longer time to revive.
Outlook
Downgrade from BUY to Reduce as the recent sharp rerating (trades at 4.6x FY22 P/ABV) assumes a rather smooth sailing through the pandemic. Equity raising (not factored by us) could support price.
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