AU Small Finance Bank - Improving visibility on growth; progress on liability franchise gives comfort - ICICI Securities

AU SFB's (AU) Q2FY21 collections at pre-Covid level of 96%, customer activation at 78% in Sep'20 and stress pool of 2.75% thus not utilising gain from Aavas divestment to shore up contingency buffer (currently ~1% of loans) summarises its expectations on asset quality and credit cost. This, coupled with improving NIM despite 18/20bps impact due to excess liquidity, disbursement in Sep'20 reaching 99% of pre-Covid level, sharp improvement in CASA ratio to 21% and focus on building the retail liability franchise suggests AU is well positioned to navigate the current cycle more effectively than others. Better than expected H1FY21 financial performance gives us comfort to revise upward our earnings estimates (adjusted for Aavas stake sale) for FY21E/FY22E by 22%/15% respectively driven by higher NII and marginally lower credit cost estimates. Maintain BUY with a revised target price of Rs935 (earlier: Rs900), valuing the stock at 4.75x FY22E BVPS. Key downside risk remains lower roll-back from the current SMA pool.

- Core performance improved - Q2FY21 supported by Aavas stake sale. AU's core performance remained on track supported by strong NII growth of 9% QoQ despite 18-20 adverse NIM impact due to excess liquidity, an encouraging trend in most core-fee income streams, and lower provisions. The management derives comfort from better than expected portfolio behavior. As a result, RoA/RoE (adjusted for Aavas) reached the pre-Covid levels of 1.7%/16.1% respectively. The bank sold partial stake in Aavas at Rs1.4bn gain (now holds 4.6% in Aavas) and the same supported strong 87% YoY growth in PAT.

- Disbursement trend showing encouraging signs. During Q2FY21, AU disbursed Rs34bn (~73% of Q2FY20) across products with retail disbursement remaining lower at 73% vs AuM share at 84%. Notably, disbursements in Sep'20 reached ~99% of Sep'19 level and the same gives us comfort to build 5% YoY AuM growth for FY21E.

- Granularization of deposits and leveraging customer base to remain at centre of business strategy. Concentrated efforts on building granular deposit base with shift in sourcing strategy from mass to quality, coupled with robust digital platform, helped deliver strong 38% QoQ growth in CASA deposits. Further, the share of retail deposits increased to 54% vs 41% in Q2FY20. To further strengthen its liability muscle, AU segregated its liability vertical into core market and urban market with aspirations to be a dominant player in the core market by leveraging its strong asset franchise.

- Portfolio behaviour better than expected. Asset quality data is not too relevant in the current quarter due to Supreme Court order, but even on pro forma basis GNPL ratio would have been flat at 1.63% vs 1.54% as reported. AU once again showed its asset-side resilience with Sep'20 collection efficiency touching pre-Covid level of ~96% and only ~2.75% of customers not paying anything since morat. As per the management, 2.75% of AuM remains at risk and it believes the current contingency buffer of 1% of loans is adequate at this juncture to absorb any asset quality shocks.

Shares of AU Small Finance Bank Ltd was last trading in BSE at Rs.775 as compared to the previous close of Rs. 781.2. The total number of shares traded during the day was 3725 in over 412 trades.

The stock hit an intraday high of Rs. 790 and intraday low of 775. The net turnover during the day was Rs. 2905560.

Source : Equity Bulls

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