AU Small Finance Bank - Q4FY21 Result Update - ICICI Securities

NPL accretion higher; biz resiliency comes to the rescue

- AU SFB's (AU) Q4FY21 performance was a mixed bag with core operating metrics trending better than expected as seen in: a) AuM growth settling much higher at 22% YoY primarily driven by retail products; b) strong traction in deposits as reflected in 38% YoY growth with CASA ratio improving to 23% and steady reduction in cost of funds; and c) continued focus on building infrastructure for sustainable long-term growth. However, we were disappointed with higher NPL accretion as GNPL ratio increased to 4.3% (vs 3.7% in Q3FY21) due to accelerated NPL recognition of portfolio worth Rs5.4bn in <90-DPD bucket and 5% drop in collections in Apr'21. Management sounded confident about the health of portfolio in <90-DPD bucket, but prudently providing for ~30% of that pool. AuM growth though witnessed strong momentum in Q4FY21, but is likely to moderate in H1FY22E due to covid resurgence. Maintain ADD with a revised target price of Rs1,140 (earlier: Rs1,320) as we trim our earnings for FY22E / FY23E by 15% / 7% respectively.

- Full-year FY21 performance comfortable on back of business resiliency. AU's core operating performance during FY21 remains best in class and justifies the premium valuation it commands over peers. AUM growth remained one of the highest at 22% YoY and the management believes portfolio quality of loans sourced in H2FY21 would be better since it was done as per the revised and more stringent credit filters. Cost / Income ratio (adjusted for Aavas income) declined to 52.4% from 56.1% in FY20, despite AU's continued investment in franchise building (branches, employees and technology). Despite elevated credit cost, PAT (adjusted for Aavas gain) remained flat at Rs6bn in FY21, the most challenging 12 months for any financier. We also note AU's focus on investing in the future with launch of credit cards, digital payment ecosystem, etc., especially at a time when most financiers are still grappling with asset quality. Key risks: a) stress unfolding higher than anticipated, and b) delay in loan growth recovery.

- Headline asset quality disappoints, but management confident about portfolio behaviour of incremental NPLs (from <90-DPD book). AU, while maintaining best-in-class asset quality across cycles thereby showing its asset-side resilience, surprised negatively with the GNPL ratio increasing to 4.3% - during Q3FY21 management had highlighted that GNPL had peaked out at 3.7% in Q3FY21. However, prudent NPL recognition of <90-DPD portfolio in the current uncertain environment is the right strategy in our view and, despite it, GNPL ratio at sub-4% is not materially higher than peers. AU carries Rs1bn of provisioning buffer to cushion earnings in FY22E from any adverse impact on asset quality due to covid second wave.

- Collections in Mar'21 at pre-covid levels, but 5% drop in Apr'21 poses risk. AU's collections reached pre-covid levels with customer activation at 90% in Mar'21 (86% full and 4% part) vs 85% in Apr'19-Feb'20 (80% full and 5% part). Except wheels (86%) and SBL / SME (87%), all other segments are receiving full EMIs from >92% of customers.

- Disbursement trend encouraging, but second wave to delay normalcy. During Q4FY21, with gradual opening up of the economy, AU disbursed Rs74bn (up 51% YoY) across products with higher disbursement in retail segment and calibrated lending in sectors like NBFC, REG, etc. However, resurgence of covid impacted business volumes and led to customer fall in Apr'21, and this is likely to delay business normalcy than earlier expected, in our view.

Shares of AU Small Finance Bank Ltd was last trading in BSE at Rs.1003.45 as compared to the previous close of Rs. 1123.95. The total number of shares traded during the day was 217781 in over 12328 trades.

The stock hit an intraday high of Rs. 1081.45 and intraday low of 994.1. The net turnover during the day was Rs. 223321729.

Source : Equity Bulls

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