On Thursday, UBS analyst revised the price target for AU Small Finance Bank Ltd (AUBANK:IN), lowering it to INR750.00 from INR770.00, while retaining a Neutral rating on the stock. The adjustment follows the bank's recent earnings report, which presented a mixed financial performance for the quarter.
AU Small Finance Bank reported a profit after tax (PAT) of Rs5.7 billion, exceeding expectations due to higher other income and reduced operating expenses. The cost-to-income (C/I) ratio saw a significant decline of approximately 410 basis points quarter-over-quarter. However, the bank also experienced elevated provisions for potential loan losses.
Net interest income (NII) for the bank grew by 58.1% year-over-year, slightly above projections, as net interest margins (NIMs) expanded by 5 basis points quarter-over-quarter to 6.1%. Despite this growth, the bank faced challenges with asset quality, particularly in its unsecured lending segments.
Total provisions were reported at 1.6% on an annualized basis, up from 1.3% in the previous quarter, driven by microfinance, credit cards, and personal loans. Gross slippages were high at around 3.2% annualized, with the unsecured segment accounting for approximately 33% of these slippages.
Looking ahead, UBS anticipates higher credit costs of around 1.6%/1.3% for the fiscal years 2025 and 2026 due to ongoing stress in the unsecured retail lending segment. Nevertheless, the bank is expected to maintain healthy margins of around 6% or more, which, coupled with lower operating expenses, should support earnings. The return on assets (RoA) is projected to see a modest increase to 1.7% by the fiscal year 2027.
The firm also noted the potential conversion of AU Small Finance Bank to a universal bank as a significant medium-term milestone. Currently, the stock trades at 2.5 times the fiscal year 2026 estimated price-to-book value (P/BV), which UBS believes fairly reflects the near-term challenges and the bank's growth prospects compared to its peers.
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