Au Small Finance Bank Ltd. share price target

We remain confident in the bank's ability to bounce back and gather growth momentum as the macro economic conditions normalise. We maintain a BUY rating on the stock with a price target of Rs 872 (4.25x Sept'22E ABV).

Asian markets are trading higher as investors focus on developments of the coronavirus vaccine after AstraZeneca resumed its phase-3 trial, while sentiments remain cautious ahead of the central bank meeting in the UK, Japan and the U.S during the week. Nikkei is trading higher by 0.71%; Hang Seng is

of preceding months being received. Total covidrelated provisionsstandatRs2.8bn,near1%ofloanbook. Thoughmanagementexpectscollectionstofurtherimprove in JulyAugust, we believe delinquencies could spike as...

4 May 2020 AU Small Finance Bank (AUBANK) reported subdued earnings, impacted by higher provisions (INR1.4b) toward SMA accounts. Overdue loans stood at INR23b (8.5% of loans) as of April20 v/s INR36b as of 1 Mar20. 29% of customers (25% of the loan book) availed moratorium, which would be the key monitorable in the near term. On the business front, loan growth moderated, while deposits stood healthy. We cut our earnings estimate for FY21/22 by 18%/10% as we factor in high credit cost and moderation in business growth. AUBANK reported 3.5% YoY growth in PAT to INR1.2b, affected by higher provisions of INR1.5b, as it made ~5% provisions (INR1.4b) toward SMA accounts, as per an RBI circular. NII grew 43% YoY (+10% QoQ) to INR5.5b NII/PPoP/PAT grew 42%/66%/77% respectively while core PPoP/adjusted PAT (adjusted for stale sale in Aavas) grew 57%/56% respectively.

Consequently, we prefer ICICIBC, AXSB and KMB amongst the large caps. We prefer CUBK amongst the pack of smaller regional banks. We maintain our REDUCE rating on RBK and KVB, despite their sharp underperformance. Recent events (YES and COVID-19) are likely to have multiple order and far reaching impacts on the banking sector. COVID-19 will obviously impact growth and asset quality. The events at YES have impacted depositor sentiment, causing them to become more risk-averse, we believe. Consequently, the less obvious (but equally important) impact is expected to play out on the liabilities side. In such a scenario, we believe deposit flows will become more polarised. Larger banks, with strong granular liability franchises, reasonable asset quality performance and sufficient capital are likely to emerge stronger.

Background: AU SFB, initially incorporated as a vehicle finance company in 1996, was transformed into a Small Finance Bank in April 2017. The bank has presence in 11 states and 1 union territory, with 496 branches, 310 ATMs, 31 asset centers and ~6,59,904 loan accounts. The bank offers a comprehensive and tailor made range of products (both asset and liability) and services to cater to the needs of various businessmen (SME and MSME) and other middle and low...

We reiterate that AUBANK represents the virtues of both a bank and an NBFC. The bank's ability to deliver strong operating performance across parameters in a challenging environment, (with considerable consistency, esp. over the trailing 3 qtrs) increases our confidence on RoAE improvement at the bank. However, in view of lofty valuations (6.5x Mar-21E), esp. after the recent run-up (48% since Sept-19), we downgrade the stock to NEUTRAL. While the mgt has indicated that the bank could raise CET 1 in FY21, we have not built this. AUBANKs 3QFY20 performance exceeded our estimates across all fronts. While we remain admirers of AUBANKs strong fundamentals and business potential, were compelled to downgrade to NEUTRAL, post the recent run up. TP of Rs 866 (4.75x Dec-21E core ABV of Rs 177 + Rs 23/sh for the residual AAVAS stake).

AUBANKs focus remains more on self-employed customers to grow its asset business supported by improving speed of execution. Average balances are INR25-30k in SA, INR110k-120k in CA and INR1.0-1.2m in FDs. Average productivity stands at ~12-15 new accounts opened per month per bank officer. AUBANK offers 28 products to customers across branches, majority of which are asset products. Asset book is gaining scale and the bank recently witnessed one of the strongest months for disbursement since inception. The bank mainly focuses on small-ticket-size loans, which provides granularity to the portfolio and ensures stable asset quality. Average ticket size is INR1.0-INR1.2m and the same has moderated over past one year as AUBANK further tightened its lending standard to maintain healthy asset quality amidst a slowing economy. Nearly 85% of vehicles are sold on finance customers themselves arrange for the loan in 15% of these cases. HDFCB and SBIN together account for ~50% of the total vehicles sold on financing.

Sector: Banks/Mid Cap | Earnings Update 2QFY20 Background: AU SFB, initially incorporated as a vehicle finance company in 1996, was transformed into a Small Finance Bank in April 2017. The bank has its presence in 11 states and 1 union territory, with 428 branches, 565 ATMs, 78 asset centers and ~5,92,929 loan accounts. The bank offers a comprehensive and tailor made range of products (both asset and liability) and services to cater to the needs of various businessmen (SME and MSME) and other middle and low...

We like AUBANK's ability to sustain quality growth, particularly in challenging environs. This, we believe, is reflective of its NBFC roots even as it gains from the troubles faced by erstwhile peers. Improvement in oplev this qtr beat estimates, and will be key to RoAA improvement. While asset quality remains stable, the bank's NBFC/RE exposure does hold some risk. Superior return ratios and improving performance across metrics warrant premium multiples. Yet again, AUBANK ticked most boxes (growth, C-I, asset quality and NIMs) with its 2QFY20 performance. Contextually, AUBANKs forward march looks even better, when peers are struggling on one or other aspect. MAINTAIN BUY with a TP of Rs 807 (4.75x Sep-21E core ABV of Rs 166 + Rs 19/sh for the residual AAVAS stake).