AU Small Bank rating: Maintain ‘add’ with target price at Rs 724

Strong fundamentals and adequate opportunity bode well for the bank’s long-term growth prospects.

HDFC Securities Institutional Research

AUBANK’s 1QFY21 net earnings were 52% higher than estimates, driven by a sharp fall in operating expenditure and high treasury gains. The reduction in moratorium or improvement in collection efficiency and retail deposit traction were promising. We continue to believe that AUBANK is one of the best- placed SFBs due to its relatively better deposit franchise, largely secured book, and strong execution track record. Strong fundamentals and adequate opportunity bode well for the bank’s long-term growth prospects. We maintain our add’ rating with a revised target price of Rs 724.)

Sequential deposit growth at 2.2% (+34.7% YoY) was in line with previous trends. SA deposits grew 15.4/13.9%, and retail SA grew faster at 25.3/17.9%. While overall TDs grew 43/4.4%, retail TDs grew at 15.6/7.1%. The share of retail deposits increased 300/200bps to 45% and the focus on granular deposits was evident. We find that these trends are promising and will watch for progress on this front.

Disbursals dipped sharply (-70.7/76.4%) to Rs 11.8 billion (including Rs 2.5 billion under TLTRO 2.0) due to Covid-19 related disruptions. Consequently, AUM growth slowed to 17.3% YoY (-2.8% QoQ). The share of retail loans (83.8%) continued to increase (+523bps YoY). Notably, within wholesale loans, loans to NBFCs dipped 41.5/18.7%. We expect AUBANK to register an AUM CAGR of 18% over FY21-22E. AUBANK’s strong fundamentals, scope for geographical expansion, and dwindling competition provide a significant long-term growth opportunity. ~11% of AUBANK’s loan book is under moratorium vs. 25% in April, indicating significant improvement. Further, borrowers representing 67/8% of the bank’s advances made full/partial EMI payments in June.