AU Small Finance Bank merger with Fincare SFB to be effective from April 1; Should you buy, sell or hold the stock?
- AU Small Finance Bank, in October last year, announced the merger scheme with Fincare Small Finance Bank Ltd, which the Reserve Bank of India (RBI) approved earlier this month.
AU Small Finance Bank’s merger with Fincare Small Finance Bank is expected to help AU Bank achieve sustainable growth, boost profitability and support stronger return ratios, analysts said.
AU Small Finance Bank, in October last year, announced the merger scheme with Fincare Small Finance Bank Ltd, which the Reserve Bank of India (RBI) approved earlier this month.
The merger will take effect on April 1 and all branches of Fincare Small Finance Bank will function as branches of AU Small Finance Bank from that date.
Under the merger agreement, shareholders of Fincare Small Finance Bank will get 579 equity shares of AU Small Finance Bank Ltd for every 2,000 fully paid-up equity shares they own.
The management of AU Small Finance Bank has laid out strategic objectives for 2027 on a merged basis. These are growing liability and asset base at CAGR of 23-25%; increasing the mix of high yield, high ROA portfolio from 70% currently to 72-75%; maintaining credit costs in the range of 60-70 bps; providing for annual credit costs of 2.5-3% for MFI business and improving ROAs to 1.8%.
It plans to achieve these objectives on account of calibrated credit card additions, higher incremental disbursement yields, successful execution of the Fincare merger and potential benefits of rate cuts given a higher share of the fixed rate book.
Here’s what brokerages have to say on the AU Small Finance Bank and Fincare Small Finance Bank merger.
Motilal Oswal Financial Services
The merger with Fincare SFB will enable AU Bank to achieve sustainable growth, while stronger return ratios for Fincare will boost profitability, particularly as operating leverage improves. After the merger, the bank is expected to expand into new geographical areas and product segments, with robust growth in high-yielding Wheels, MFI, Gold and SBL segments, Motilal Oswal said.
Moreover, since Fincare is a rural-focused small finance bank with 85% of its advances qualifying under the priority sector, the merger will enable AU Bank to not only meet its PSL target but also generate PSLC income in the long run, the brokerage added.
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It believes that the bank’s execution capability will play an important role in maintaining robust growth and asset quality metrics while delivering healthy RoA. It is optimistic about smooth execution, given the management’s execution prowess and track record over the past couple of decades.
The brokerage reiterated its ‘Buy’ rating on the stock with a target price of ₹720 per share.
Nuvama Institutional Equities
The brokerage estimates cost of funds (CoF) to continue to rise in Q4FY24 and FY25 as incremental CoF at 7.7% is higher than average CoF of 6.7% for 9MFY24. AU Bank’s management has guided for CoF of 6.9% for FY24E and a YoY rise of 45 bps in FY25.
Nuvama Institutional Equities maintained a ‘Reduce’ call on the stock, arguing that AU Bank is expensive even after the price correction at 2.5x BV FY25E for its RoA of 1.6% in FY25E. It cut the target price to ₹530 per share from ₹560 earlier.
JM Financial
Merger with Fincare SFB is expected to provide wider distribution channels (resulting in 2x touch points), opportunity to expand customer base and geographic presence (Fincare has 49% branches in South of India) and address PSL shortfall of AU (Fincare has 85% share of PSL advances). Successful execution of these initiatives would diversify the business and support ROAs, JM Financial said.
AU Small Finance Bank shares have corrected by about 29% from its peak and the brokerage believes at current valuations of 2.24x FY26e P/BV, AU Bank offers a reasonable margin of safety given its core strengths of risk focus and growth focus have not changed.
Hence, it upgraded AU Small Finance Bank to a ‘Buy’ from ‘Hold’, but cut the target price to ₹675 per share from ₹725 earlier.
Emkay Global Financial Services
Emkay Global Financial Services believes that managing HR and tech integration with Fincare and MFI portfolio amid rising asset quality risk will be an arduous task. Separately, stress is on the rise in AU Bank’s own card and VF portfolio, which coupled with integration cost and continued operational burn in new businesses and phygital footprint expansion could restrict near-medium term earnings.
The brokerage retained a ‘Reduce’ rating on the stock and cut the target price to ₹600 per share from ₹625 earlier.
At 11:05 am, AU Small Finance Bank shares were trading 0.82% lower at ₹565.60 apiece on the BSE.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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