AU Small Finance Bank tumbles 5% as asset quality deteriorates in Q1

Apart from weakening asset quality, KIE also pointed a finger at AU Small Finance Bank’s expensive valuation.

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Shares of AU Small Finance Bank slumped over 5 percent in early trade on July 24 after the lender posted a decline in its asset quality in the April-June quarter.

Despite recording a 44 percent on year growth in net profit, the lender’s asset quality deteriorated in Q1. Gross non-performing assets for the lender rose to 1.76 percent in Q1, up from 1.66 percent seen in the preceding quarter. Net NPA’s also moved higher to 0.55 percent from the previous quarter’s 0.42 percent.

Moreover, net interest income also rose 27.7 percent on year to Rs 1,246.2 crore, but remained flat sequentially due to a 40 basis point contraction in margins.

Sanjay Agarwal, Managing Director of AU Small Finance Bank also said that he expected pressure on net interest margins on the back of a pause in interest rate hikes. However, he also said that the lender will be able to improve NIMs once interest rates reverse.

Consequently, reacting to the lender’s subdued Q1 performance, at 10.18 am, shares of AU Small Finance Bank were trading with a cut of 4.4 percent at Rs 734.40 on the National Stock Exchange.

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Foreign brokerage Morgan Stanley also highlighted that the moderation in the lender’s margin was higher than the firm’s expectation. However, the firm also attributed some weakness in the quarter to a weak a seasonality. Hence, Morgan Stanley expects margin to pick-up from the second half of the fiscal, along with a strong loan growth which will drive compounding for the lender.

Motilal Oswal Financial Services also fine-tuned its estimates post the lender’s subdued results and now expects it to deliver a 28 percent earnings CAGR (Compounded Annual Growth Rate) over FY23–25, with RoA (Return on Assets)/RoE (Return on Equity) of 1.9 percent/17.4 percent in FY25E. The firm has a ‘neutral’ stance on AU Small Finance Bank, with a price target of Rs 810.

On the other hand, Kotak Institutional Equities also emphasised the lender’s expensive valuation, which prompted the firm to assign a ‘sell’ call for the stock.  Likewise, KIE has a target price of Rs 600 for the stock, reflecting a downside potential of around 22 percent from the previous close.

KIE also believes the lender’s premium valuation is a result of its consistent execution capability, seen in the past few years. “However, we are now in a period where the differentiation from peers on both operating and asset-quality metrics is likely to narrow, while the lender itself tides over challenges on operating profitability,” KIE mentioned in its report.

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