Encouraging operating and collections performance; high valuation caps upside, so retain REDUCE
Unarguably, AU Bank is a solid franchise with strong potential growth and profitability prospects. And Q2 FY21 results, particularly the recovery in customer activation and collection efficiency, demonstrates this. With variance in these collection parameters not that significant from pre-Covid levels, the Management decided to not make any additional covid-related provisions (at 1% of adv. v/s current non-paying portfolio at 2.5-3%). With resolution mechanisms like restructuring and ECLGS available, the eventual credit cost spike for FY21 is likely to be lower than our previous expectations. Also, NIM should get a fillip from declining funding cost, reduction in surplus liquidity, improvement in loan traction and fixed-rate retail book. We estimate RoA increasing to 1.8-1.9% in FY22 sans any stake sale gains in Aavas and substantial treasury income. AU SFB trades at elevated valuation of 4.2x FY22 P/ABV for the aforesaid RoA delivery, and this holds us back from changing our current stance, as we see relative stock underperformance in the coming months.
Strong core operating performance
- AU delivered a strong operating performance with a 14% core revenue (NII + Core Fees) and PPOP beat and 86% earnings beat (much lower than anticipated provisions) on our expectations.
- AUM grew by 2% qoq (v/s expectation of remaining flat), driven by healthy traction on SBL MSME and robust growth in home loans on a small base.
- Disbursements were nearly 2x of Q1 FY21 level and were at 71% of Q2 FY20 level. However, September disbursements were 99% of previous year level.
- Reported NIM improved 30 bps qoq to 5.3% on the back of 20 bps reduction in the cost of funds (strong growth in low-cost CASA and reduction in TD rates) and some improvement in LDR.
- The bank maintained excess liquidity during the quarter which had an approx. impact of 18-20 bps on NIM. It is now focusing on reducing this buffer.
- Reduction in reported Gross/Net NPL levels due to low slippages on account of moratorium and SC stand-still. Including impending slippages not classified due to SC order, the GNPL would increase by only 10 bps (bank has made some contingent prov. on it).
- Collection efficiencies in September was near normal with 78% customer activation v/s 80% in usual course. Complete moratorium customers have consistently come down since June (11% of borrowers), to 5.5% by end August and 2.5-3% at present.
- Based on activity levels of complete moratorium cases and collection feedback, the bank has not made any further COVID-19 related provisions (continues to be at Rs2.8bn, 1% of gross advances).
- Capital adequacy remains strong with CRAR and Tier 1 at 21.5% and 18.3% (against a minimum requirement of 15% and 7.5%) respectively. Further, the Bank holds 4.57% stake in Aavas Financiers (as on 30th Sep'20).
Shares of AU Small Finance Bank Ltd was last trading in BSE at Rs.775 as compared to the previous close of Rs. 781.2. The total number of shares traded during the day was 3725 in over 412 trades.
The stock hit an intraday high of Rs. 790 and intraday low of 775. The net turnover during the day was Rs. 2905560.