AU Small Finance Bank Q2 Results Review - Robust Earnings Beat Despite Asset Quality Challenges: Motilal Oswal

Motilal Oswal Report

AU Small Finance Bank Ltd. reported a Q2 FY25 PAT of Rs 5.71 billion (16% beat) fueled by healthy other income and controlled opex, which offset higher provisions.

Net interest income grew 2.8% QoQ to Rs 19.7 billion (in line). NIM improved 5bp QoQ to 6.1%.

AU Small Finance Bank's pre provision operating profit stood at Rs 11.3 billion (13% beat) as opex came in 6% lower than our estimate and other income stood at Rs 6.4 billion (5% beat). Cost-to-income ratio thus declined sharply to 56.7% versus 60.8% in Q1 FY25.

Business growth was healthy, with advances growing at 5.8% QoQ to Rs 948.4 billion while deposits grew at a robust 12.7% QoQ to Rs 1.09 trillion. As a result, the overall CD ratio eased sharply to 86.5% (92.1% in Q1 FY25).

Slippages were elevated at Rs 7.4 billion versus Rs 5.4 billion in Q1 FY25. Gross/net non-performing asset ratio increased 20 bp/12 bp QoQ to 1.98%/0.75%. Provision coverage ratio declined 229 bp QoQ to 62.8%. Credit costs as % of total assets were elevated at 0.28% (1.1% annualized).

We tweak our estimates slightly and estimate the bank to deliver an return on asset/return on equity of 1.7%/16.2% by FY26. Reiterate Buy with a target price of Rs 830 (based on 3.2 times FY26E book value).

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