Synopsis: AU Small Finance Bank (AUSFB) is charting a path toward robust earnings growth, despite short-term asset quality challenges. The bank's strategies are designed to counter rising credit costs with improved operational efficiency, setting the stage for long-term profitability. Analysts are optimistic, projecting a 30% CAGR in earnings from FY24 to FY27, supported by stable margins, cost control measures, and efforts to mitigate credit quality pressures.
AU Small Finance Bank (AUSFB) is focusing on a multifaceted strategy to manage rising credit costs while enhancing operational efficiency.
These measures aim to ensure long-term profitability and counterbalance current asset quality concerns.
Analysts project a promising trajectory, with AUSFB’s earnings expected to achieve a compound annual growth rate (CAGR) of 30% over FY24-FY27.
This projection is fueled by the bank’s cost-saving initiatives, targeted growth in secured credit, and stable net interest margins (NIMs), despite challenges in the unsecured lending space.
Navigating Asset Quality and Credit Costs:
The bank’s asset quality remains under strain, notably with higher slippages across both secured and unsecured portfolios.
As of Q2FY25, AUSFB’s gross non-performing asset (NPA) ratio increased to 1.98% from the previous quarter’s 1.78%, while the net NPA ratio rose to 0.75%.
In response, AUSFB has strengthened its underwriting practices and intensified collection efforts to curb further deterioration.
However, the bank anticipates elevated credit costs through the remainder of FY25, largely due to stress in unsecured segments such as microfinance and credit cards.
Management remains optimistic about secured business performance and aims to reduce overall credit costs in the second half of FY25 to levels similar to the first half, with only slight deviations of 5-10 basis points.
In alignment with this, AUSFB has set an FY25 return on assets (RoA) target of 1.6%, with aspirations to reach 1.8% by FY27, as asset quality stabilizes.
Margin Resilience and Cost Control Measures:
AUSFB has managed to deliver stronger-than-expected margins, with net interest margins (NIMs) improving to 6.1% in Q2FY25.
Contrary to industry expectations of margin compression, management anticipates NIMs to remain stable at around 6% for FY25, supported by consistent lending yields across key segments like vehicle loans, home loans, and gold loans.
Furthermore, the cost of funds (CoF) is expected to remain favorable, settling at approximately 7.1-7.15%, lower than earlier projections of 7.2-7.25%.
Fee income growth also remains steady, which, combined with AUSFB’s commitment to improving its cost-to-income (C-I) ratio to 60% in FY25, is likely to support profitability targets.
AUSFB aims to achieve these improvements by enhancing employee productivity and optimizing branch profitability.
These gains, alongside stable margins and increased operational leverage, are projected to offset elevated credit costs, contributing to the bank’s overall growth objectives.
Outlook and Valuation:
AUSFB’s proactive stance on managing asset quality, coupled with its focus on high-margin segments and selective growth in high-risk unsecured portfolios, has garnered positive analyst sentiment.
Both Axis Securities and Elara Securities have maintained a "BUY" recommendation for AUSFB, with a target price of Rs. 800 per share.
The bank’s valuation stands at approximately 2.9x its estimated book value for September 2026, signaling confidence in AUSFB’s ability to navigate current challenges while delivering sustained growth.
Looking ahead, AUSFB is positioned to achieve RoA and RoE targets of 1.7-1.8% and 16-18%, respectively, over FY26-FY27.
These goals underscore the bank’s strategic approach toward reinforcing its balance sheet through cost management and careful credit quality oversight.
In conclusion, AU Small Finance Bank is employing a balanced approach, addressing short-term asset quality concerns while investing in operational efficiencies to ensure sustainable growth.
By focusing on cost control, margin stability, and disciplined credit management, AUSFB aims to overcome current challenges in unsecured lending and secure a profitable long-term outlook.
Analysts remain confident in the bank’s growth trajectory, underscoring its strong foundation for future earnings and valuation gains.
Disclaimer: This article is intended for informational purposes only. The projections and analyses presented herein are based on industry research and expert opinions but should not be construed as financial advice. Readers are encouraged to consult with financial professionals before making investment decisions.
