Target: ₹680
CMP: ₹566.05
We attended the Analyst Meet hosted by AU Small Finance Bank (AUSFB) to discuss the roadmap for the bank upto FY27E, post the merger and as it completes a decade as a bank. The management team also discussed the near-term challenges for the bank and the impact of the merger with Fincare SFB (Fincare).
AUSFB has been facing headwinds on margins owing to the portfolio mix shifting towards lower-yielding/RoA products along with additional pressure from CoF headwinds. The management expects near-term pressure on margins to persist. With the focus now shifting towards enhancing the mix of high-yield/RoA products in the portfolio and with additional support from the merger with MFI/Gold loans forming part of the portfolio, along with expectations of a rate cut benefiting AUSFB’s largely fixed book, margins are anticipated to receive support.
AUSFB aspires to scale back RoA of 1.8 per cent driven by improving margins, gradually improving cost ratios, and strengthening the fee income profile. We believe the ROA improvement trajectory will be slower and expect AUSFB to deliver a RoA of 1.7 per cent by FY26E.
The stock has corrected sharply post-Q3FY24 results, largely owing to margin headwinds and pressures on asset quality and credit costs in the credit card portfolio. We reiterate our Buy recommendation with a revised target price of ₹680 (₹780 previous target).
