Synopsis: AU Small Finance Bank reported a 41% YoY rise in net profit to Rs 528 crore for Q3 FY24, driven by a 50% increase in interest income. Shares dropped 8.4% to Rs 544 on the BSE after brokerages flagged concerns over asset quality, rising slippages, and elevated credit costs. Nuvama and Nomura downgraded the stock to "reduce" and slashed target prices, projecting further downside. Revised loan growth and credit cost guidance reflect cautious near-term profitability outlook.
Jaipur-based AU Small Finance Bank reported robust earnings for Q3 FY24, with a 41% year-on-year (YoY) jump in net profit to Rs 528 crore, compared to Rs 375 crore in the same period last year.
Total income surged by 48% YoY to Rs 4,732 crore, fuelled by a 50% increase in interest income to Rs 4,113 crore.
Despite these strong financials, concerns over asset quality and rising credit costs led to an 8.4% decline in the bank's share price, closing at Rs 544 on the BSE.
Brokerages Raise Concerns Over Asset Quality:
Brokerages, including Nuvama and Nomura, flagged deteriorating asset quality and elevated credit costs as critical concerns:
- Nuvama: The brokerage lowered its target price to Rs 530 (from Rs 590) and downgraded the stock to "reduce." It highlighted a sharp 30% quarter-on-quarter rise in slippages, driven by stressed loans in the microfinance and credit card portfolios. Credit costs grew 35% sequentially, reaching 1.8% of gross loans.
- Nomura: Similarly, Nomura cut its target price to Rs 500 (from Rs 580), citing elevated Gross Non-Performing Assets (GNPA) levels in microfinance and credit cards. A decline in net interest margins (NIM) to 5.9% further compounded concerns. Nomura also revised its FY26-FY27 earnings estimates downward by 5%.
Market Reaction and Outlook:
At the current stock price of Rs 544, Nuvama\u2019s target price implies a 2.6% downside, while Nomura\u2019s projection suggests an 8% potential downside. The bank\u2019s management revised its loan growth guidance for FY25 to 20% from 25%, while raising credit cost estimates to 1.5-1.6% from 1.25-1.35%.
Corrective Measures Underway:
AU Small Finance Bank\u2019s management has implemented corrective measures to address asset quality issues. However, brokerages remain cautious, noting subdued returns and limited re-rating potential in the near term.
