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Axis Securities Report
AU Small Finance Bank Ltd. has been facing headwinds on margins owing to the portfolio mix shifting towards lower-yielding/return on asset products along with additional pressure from cost of fund headwinds.
The management expects near-term pressure on margins to persist. With the focus now shifting towards enhancing the mix of high-yield/RoA products in the portfolio and with additional support from the merger with micro finance/gold loans forming part of the portfolio, along with expectations of a rate cut benefiting AU Small Finance Bank's largely fixed book, margins are anticipated to receive support.
AU Small Finance Bank aspires to scale back RoA of 1.8%, driven by improving margins, gradually improving cost ratios, and strengthening the fee income profile. We believe the ROA improvement trajectory will be slower and expect AU Small Finance Bank to deliver a RoA of 1.7% by FY26E.
Cost-income ratio reduction would be a key factor in this RoA improvement. The stock has corrected sharply post-Q3 FY24 results, largely owing to margin headwinds and pressures on asset quality and credit costs in the credit card portfolio.
We believe the current risk-reward is favorable. We reiterate our Buy recommendation on the stock with a revised target price of Rs 680/share (2.7 times FY26E adjusted book value), implying an upside of 19% from the current market price.
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