Hold AU Small Finance Bank; target of Rs 880: Emkay Global Financial

Emkay Global Financial's report on AU Small Finance Bank

Despite moderate loan growth, AU SFB reported higher PAT of Rs3.2bn vs. estimate of Rs1.7bn on a one-off gain from the stake sale in Aavas Financiers (Rs1.25bn) and lower provisions as the bank chose higher profitability instead of shoring up its relatively moderate contingent provision buffer (~1% of AUM). CASA ratio improved sharply (up 600bps qoq) to 20%, driven by strong SA growth, which in turn was driven by the continued focus on retail customer acquisition, including NRI/Sr Citizens and reducing the dependence on bulk deposits. Customer activation rate in Sep was better at 78% vs. 80% at BAU levels. However, nearly 3% of the customers have still not paid any EMIs in Sept/Oct although the bank remains hopeful of recoveries in this pool and thus has not made any additional provision in Q2.

Outlook

We raise our earnings estimates by 13-20% over FY21-23E and thus revise TP to Rs880 (3.8x Dec FY22E core ABV). Maintain Hold given rich valuations. We believe that the stock’s performance hereon should largely track growth/asset-quality movement.

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