AU Small Finance Bank - Niche rock-solid; growth to take a backseat - ICICI Securities

The only rationale for downgrading AU Small Finance Bank (AU) one notch is rich multiple at 4.4x FY22E book capping interim valuation upside, especially when growth will take a backseat (13% asset growth over FY20-22E). Otherwise, Q1FY21 earnings vindicated its asset niche and superior collection mechanism with 67% customers honouring full obligation, 8% partial and merely 11% seeking moratorium (better than peers). Also, encouragingly it is: 1) Strengthening contingency buffer further by Rs1.4bn, utilising treasury gains (taking cumulative buffer to ~1% of AUM); 2) building granular deposit base; 3) using variable cost levers (opex down 30% QoQ); 4) entrenching leadership in core markets; 5) adequate capitalisation (tier-1 - 18.5%) would help it navigate cycle more effectively. Given >18% RoE over FY22/23 and earnings growth of 20% over FY20/22e, it deserves multiple of 5x FY22E book making us revise TP upwards to Rs900 (Rs790 earlier). Given its recent outperformance (>50% return in 3M), we are downgrading reco to ADD.

- Core performance stable but AuM growth decelerated to 17% YoY (down 3% QoQ). Core performance of the bank remained on track supported by treasury income of Rs1.58bn, and to our liking, it utilised the same to build contingency buffer (~1% of loans). Further, it showed strong cost flexibility with total opex falling by 30% QoQ and cost/income ratio declining to 40% in Q1FY21; however, cost ratios are unlikely to sustain at current level going forward. NII fell 7% QoQ mainly due to 3% QoQ decline in AuM. With incremental cost of funds being ~120bps (6.0%) lower than blended CoF (7.2%), margins could surprise positively in coming quarters. AuM growth deceleration was on expected lines given muted credit demand at system level due to lockdown and management's increased focus on asset quality management rather than fresh disbursements.

- Portfolio behaviour is better than expected. While asset quality data is not much relevant in the current quarter due to moratorium, GNPL ratio is remaining flat at 1.7% in Q1FY21. Underlying trend in portfolio is most important and AU once again showed its asset-side resilience with June'20 collection efficiency touching ~90% and only ~11% of customers by value under morat 2.0. Further, customer activation rate has also improved, exceeding management's expectation to 75% (8% paid partial EMIs) vs monthly average of 85% (5% partial) between April'19 and February'20.

- Liability franchise progressing well - roll out of new strategy to leverage asset franchise. It remained committed in building granular deposit base, robust digital platform and concentrated efforts towards deposit mobilisation helped in delivering 4% QoQ growth in deposits (ex-CDs) even during the most challenging quarter. Further, the share of retail liability increased to 45% vs 42% in Q1FY20 led by strong 14% QoQ growth in saving accounts. To further strengthen its liability muscle, AU segregated its liability vertical into core market banking and urban market with aspiration to be a dominant player in core market by leveraging its strong asset franchise in those markets.

Shares of AU Small Finance Bank Ltd was last trading in BSE at Rs.790 as compared to the previous close of Rs. 756.75. The total number of shares traded during the day was 275681 in over 4885 trades.

The stock hit an intraday high of Rs. 794.55 and intraday low of 758.75. The net turnover during the day was Rs. 218493855.

Source : Equity Bulls

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