AU Small Finance Bank (AU SFB) has kicked off FY27 on a steady footing. Its June quarter (Q1) business update showed deposits rising 23.5% year-on-year to ₹1.58 trillion despite intense competition for deposit mobilization.
While its gross loan portfolio grew at a slower 22.6% to ₹1.44 trillion, gross advances (excluding securitized and assigned portfolios and interbank participation certificates) expanded 25.8% to ₹1.4 trillion. The stock gained 3% intraday on Monday.
To be sure, system-wide credit-growth has been strong too. In the year ended 15 June 2026, it was pegged at 17.7%, Motilal Oswal Financial Services said. AU SFB’s superior growth is in line with the management’s stated aspiration of growing at 2.25-2.5 times the nominal GDP growth.
Its mainstay segment of vehicle financing, which made up a third of its loan book as of 31 March, has been supporting growth, aided by GST 2.0-powered automobile demand. Growing traction in the southern markets, thanks to synergies from the Fincare merger, coupled with the management’s push on gold loans, is likely to have supported credit growth in Q1.
Current account and savings account (Casa) deposits rose 21.9% to ₹45,400 crore, while the Casa ratio improved sequentially to 28.8% from 28.4% in March. This matters because many lenders have struggled to mobilize low-cost deposits over the past year, forcing them to rely on costlier term deposits and squeezing margins.
Questions remain
Notably, AU SFB had increased deposit rates in April. That is likely to have pushed up the cost of funds in Q1. Motilal Oswal expects AU SFB's net interest margin to compress to 5.83% from 5.96% in the previous quarter. Credit-costs also need monitoring after the finance ministry’s earning-warning signals of stress in retail, agriculture and MSME loans.
AU SFB has guided for about 0.9% credit cost in FY27. A quarter of the lender’s advances is concentrated in micro-business loans. Moreover, whether the momentum in vehicle financing has sustained in Q1 amid rising crude oil and commodity costs and a fading GST 2.0 remains to be seen.
The bank has invested heavily in distribution expansion, technology, manpower and marketing. The growth so far has been commensurate, driving down cost-to-income. It is important for the trend to sustain this quarter as well.
Meanwhile, AU SFB has doubled down on initiatives to boost fee income and deposit growth. It launched a zero-margin forex remittance service to expand its non-resident Indian offerings in May, before raising the interest rate of FCNR deposits to as much as 7.1%—the highest among Indian banks—since the Reserve Bank of India sweetened the deal by lifting rate caps and taking on currency hedging.
Apart from launching promotional credit cards and digital banking products, it has entered wealth partnerships to push cross-selling and accelerate fee-income growth, and a partnership with Maruti Suzuki India Ltd to drive growth in first-time car buyers’ vehicle financing.
As AU SFB transitions into a universal bank, its margins are slated to expand and return ratios are expected to improve on the back of rationalized savings account interest rates and lower regulated priority sector lending. Larger-ticket lending should also boost cross-selling and accelerate fee-income growth.
The stock has gained over 30% in the past year, taking its valuation to 2.9 times FY28 book-value estimates, according to Bloomberg. The question is whether it can continue growing with superior margins and asset quality to justify a valuation that already prices in much of the optimism.