Maintain ADD on AU Small Finance Bank - Negative surprise to the asset quality - HDFC Securities

Mr. Bansi Desai, CFA, HDFC Securities and Mr. Karan Vora, Institutional Research Analyst, HDFC Securities

AU Small Finance Bank's (AUBANK) 4QFY21 PPOP growth was below expectations due to higher-than-expected operating expenses, partially offset by higher fee income (PSLC etc). Balance sheet continued its strong momentum of growth (AUM/disbursement growth of ~14% QoQ), driven by wheels, SBL, and housing. However, the bank surprised negatively on the asset quality front with GNPAs at 4.3% (pro-forma GNPA at 3.3% in 3QFY21), far higher than our expectations. We revise our FY22/FY23 earnings downwards by 9.9%/6.5%, primarily on account of higher LLP, although LGDs are likely to remain unchanged. Maintain ADD with revised TP of INR1,056.

Subdued P&L performance; growth outshines: AUBANK reported NII growth of 18% YoY, reflating NIMs (5.3%) and C/I ratio of 60% (3QFY21: 52%). The bank resumed its expansion mode with addition of 43 branches and 3.5K employees during the quarter to drive business growth. Disbursements /AUMs grew by ~14% QoQ, and are poised for strong growth in FY22 as well. CASA ratio improved to ~23% (3QFY21: 21%) with cost of SA at 5.7%.

Negative surprises in asset quality: AUBANK's reported GNPA (4.3%) came in way higher than our expectations with pro-forma slippages at ~6% of AUM. While the management has indicated that INR5.4bn of GNPAs are making some form of payments, we remain watchful for such slippages in the next few quarters. The bulk of the slippages were from the Wheels and SBL-MSME segment with LGDs <40% and <30% respectively. Restructured book is also on the higher side at ~2% of AUM. We increase our LLP estimates for FY22 and FY23 by 0.4%/0.3% on account of this disclosure.

Rich valuations leave little room for error; maintain ADD: AUBANK's rich valuations and its track record on asset quality leave little room for such negative surprises. We remain watchful for further developments in the next few quarters on the asset quality front. However, the bank's high steady- state profitability, high growth, and robust asset quality in segments with high-yields have warranted premium valuation. Maintain ADD.

Shares of AU Small Finance Bank Ltd was last trading in BSE at Rs.915.35 as compared to the previous close of Rs. 923.85. The total number of shares traded during the day was 102711 in over 4250 trades.

The stock hit an intraday high of Rs. 957.65 and intraday low of 913. The net turnover during the day was Rs. 95932148.

Source : Equity Bulls

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