AU Small Finance Bank - Laying Strong Foundation Of A Forever Bank: Motilal Oswal

Motilal Oswal Report

AU Small Finance Bank Ltd. has historically reported healthy return on asset; however, it has compressed over FY24, primarily due to a decline in margins and a rise in credit costs.

While the merger with Fincare is earnings per share, book value, and RoA accretive, aided by stronger return ratios in micro finance, gold, and secured business loan portfolios, the competition for liabilities and integration costs will largely offset any near-term benefits.

However, we believe that RoA should gradually improve toward 1.7% by FY26E as the bank benefits from operating synergies and as the moderation in funding costs improves margins. The bank has guided FY27 RoA of 1.8% as it continues to make investments in building a forever bank in the first 10 years of its operations.

By strategically incorporating ~7.5% of the rural-focused MFI portfolio into its loan book, the merger helps AU Small Finance Bank diversify its lending portfolio while boosting overall yields. Moreover, Fincare's robust presence in southern India augments AU Small Finance Bank's geographical footprint.

We believe that the bank’s execution capability will play an important role in maintaining robust growth and asset quality metrics while delivering healthy RoA.

We are optimistic about smooth execution, given the management’s execution prowess and track record over the past couple of decades. We reiterate our Buy rating on the stock with a target price of Rs 720 (2.7 times FY26E book value).

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