AU Small Finance Bank is facing a target of Rs 580, according to HDFC Securities. The bank’s performance in the previous quarter slightly surpassed estimates due to lower-than-expected credit costs. However, there was a miss on other income. Despite this, AU Small Finance Bank maintained sequential momentum in loan growth, with a 7.6% increase quarter-on-quarter. Deposits, on the other hand, remained relatively flat.
AU Small Finance Bank’s net interest margins (NIMs) experienced a 40 basis point decrease quarter-on-quarter to 5.7% due to a drop in low-cost CASA (current account and savings account) of 300 basis points sequentially. The bank has limited room for yield reflation as the majority of its loans are fixed-rate (66% of assets under management). Additionally, there is surplus liquidity.
The bank continues to invest in various aspects of its business, including franchise-building activities, credit cards, and digital initiatives. These investments may impact its medium-term profitability before the benefits of operating leverage start to materialize in FY25, as guided by the management. It is expected that efficiency gains will be gradual, and the margin reflation will depend on a turnaround in the interest rate cycle.
HDFC Securities has adjusted its estimates for AU Small Finance Bank for FY24 and FY25 modestly, considering the ongoing moderation in margins and higher operating expenses. Despite these adjustments, they maintain a REDUCE recommendation on the stock, with a target price of INR 580, based on a multiple of 2.7 times the March 2025 adjusted book value per share.
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