On Wednesday, BofA Securities revised its stance on AU Small Finance Bank Ltd (NS:AUFI) (AUBANK:IN), downgrading the stock from Neutral to Underperform and reducing its price target to INR680.00 from the previous INR750.00. The adjustment follows concerns over the bank's recent acquisition of a microfinance business, which has cast doubts on the asset quality outlook for the next two to three quarters.
The bank's premium valuations have been partly justified by its strong growth profile and execution track record. However, the analyst from BofA Securities highlighted potential stress in the bank's core business and uncertainty regarding asset quality. This could pose risks to the bank's growth and net interest margin (NIM) targets, especially if the current slower growth environment continues and asset quality issues are not resolved promptly.
The report also notes that while AU Small Finance Bank could benefit from a policy rate cut cycle, helping it maintain its current valuation premiums, a deeper rate cut cycle could signal a weaker growth environment. This scenario would not be favorable for the bank to expand its valuation premium. Additionally, the bank's low Liquidity Coverage Ratio (LCR) of 112% is seen as another potential downside risk, particularly in light of the Reserve Bank of India (NS:BOI)'s (RBI) upcoming revision to LCR norms.
In conclusion, BofA Securities sees more favorable risk-reward in other mid-cap private banks, such as IIB and Bandhan, which are perceived to offer a better margin of safety in terms of valuations compared to AU Small Finance Bank.
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