AU Small Finance Bank: Brokerages retain views after in-line Q4; should you buy?

Shares of AU Small Finance Bank fell over 4 per cent in morning trade on April 26, a day after the company reported its March quarter earnings which showed upbeat bottom-line numbers.

On April 25, AU Small Finance Bank reported a 22.7 per cent growth in net profit to ₹424.6 crore in Q4FY23 compared to ₹346.07 crore in the same quarter last year.

The bank posted healthy growth in interest income, while provisions dipped sharply year-on-year and asset quality improved further.

Net interest income (NII) which is the difference between interest earned and expended, came in at ₹1,213.20 crore in Q4FY23, increasing by 29.54 per cent from ₹936.56 crore in Q4 of the previous fiscal.

Read more: AU Small Finance Bank beats estimates to report Q4 PAT of ₹425 cr up by 23% YoY, declares dividend

What does brokerage say?

Most brokerage firms have retained their views on the stock after the company's March quarter numbers. Besides, brokerage firms have mixed views about the stock's future prospects.

Brokerage firm Motilal Oswal Financial Services maintained a 'buy' call on the stock with a target price of ₹760 after the bank's Q4 numbers.

Motilal said AU Small Finance Bank reported an in-line quarter, supported by lower provisions and tax reversals. However, the operating performance saw a slight miss, with margins moderating QoQ.

The brokerage firm highlighted that on the business front, the bank's business growth was healthy, while CASA deposits increased, led by current account deposits. Moreover, the bank carries contingent reserves of nearly ₹90 crore (15bp of loans), which, coupled with 17 per cent coverage on restructured assets, provides comfort.

"We largely maintain our estimates. We expect AU Small Finance Bank to deliver a 28 per cent earnings CAGR over FY23-25, with RoA ((return on assets) and RoE (return on equity) of 1.9 per cent and 16.9 per cent, respectively, in FY25E," Motilal said.

Brokerage firm Nirmal Bang has maintained an 'accumulate' call on the stock with a target price of ₹680.

"We believe that the bank is trading at a premium valuation and is already pricing in a strong growth runway, an improved liability franchise and stable asset quality. We maintain an 'accumulate' rating with a target price of ₹680 (3.2 times FY25E price-to-book value)," said Nirmal Bang.

Commenting on the Q4FY23 performance of the bank, the brokerage firm said AU Small Finance Bank's PAT numbers were 7 per cent above its estimates due to lower-than-expected credit costs.

The brokerage firm highlighted that the bank's management expects net interest margin (NIM) to contract by 30-40bps going forward as the share of low-yielding secured books increases while the cost of funds is expected to remain elevated.

However, the management remains confident about balance sheet growth, said Nirmal Bang, adding that the bank's Opex may remain elevated as it continues to invest in technology.

Nirmal Bang believes that margin moderation and higher costs are likely to impact return ratios.

It expects RoA and RoE of 1.6 per cent and 13.9 per cent, respectively, for FY24 and 1.7 per cent and 15.5 per cent, respectively, for FY25.

Brokerage firm Emkay Global Financial Services maintained a 'hold' call on the stock with a target price of ₹700.

Emkay largely retained its earnings for FY24-25E and expects the bank to deliver 1.8 per cent RoA and 15-17 per cent RoE over FY24-26E, led by healthy growth, margins and steady moderation in cost-income ratios.

"We retain our hold rating on the stock, with a revised target price of ₹700, valuing the standalone bank at 3.2 times FY25E ABV (adjusted book value) versus 3.4 times Dec-24E ABV earlier," said Emkay.

The brokerage firm highlighted slower-than-expected credit/deposit growth and higher NPA formation in case of severe macro/micro dislocation, and elevated cost ratios in the run-up to its conversion into a universal bank are the key risks for the bank.

Brokerage firm Nuvama Wealth Management maintained a 'reduce' call on the stock with a target price of ₹560, citing it finds better value in other banks.

"At 3 times BV FY25E, AU is expensive because its RoA is equal to or lower than peers including ICICI, HDFC Bank and IndusInd Bank, which trade cheaper," Nuvama said.

"While AU’s loan growth is higher, its weaker deposit profile and higher Opex yield an RoA that is equal to or lower than peers. Retain ‘reduce’ as we find better risk-reward elsewhere," said Nuvama.

Disclaimer: The views and recommendations given in this article are those of brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.