Objective: ₹ 600
CMP: ₹ 666.25
Au Small Finance Bank continues to increase its credit portfolio at a healthy pace, the tendency of the parasification industry and the MFI book/decline cards. However, a greater reversal of COF and interest in NPA of MFI/card has led to a continuous margin correction (10bps qoq). This, together with the high credit cost, has maintained the bank’s roa in control of 1.3 percent in the fourth quarter and 1.5 percent in fiscal year 2015.
He thought that the bank continues to trust strong growth in fiscal year 26, hopes that the margins will remain soft and credit costs rise in H1-FY26. According to management, approximately 16 percent of the portfolio remains affected by the guidelines of Mfin 2.0 (about 13 percent of loans have more than 3 lenders, and the rest have a total unknown exposure of more than ₹ 2 Lakh), and would be closely monitored.
Given the macro uncertainty, and the quality of assets and cost pressures in the period prior to the transition to become a universal bank, management has resisted providing orientation to the roa for fiscal year 26E. Management expects to ensure a universal banking license on CY25 and would take a call on capital compliance.
We retain the reduction with TP without changes of ₹ 600 (2x FY27E ABV), and we expect better clarity on the quality trajectory of assets/margin.
Key risks: Faster than expected margin/change of asset quality.
Posted on April 23, 2025