Au Small Finance Bank Ltd. share price target

Sector: Banks/Mid Cap | Earnings Update 4QFY19 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 408 branches, 543 ATMs, 83 asset centers and ~4,95,209 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...

The bank's demonstrable focus on growing both sides of the B/S continues to impress. With a large addressable opportunity, tepid competition from smaller NBFCs and sufficient capital, we expect growth to sustain. A reasonable fix on asset quality is an additional positive. Improvement in operating efficiency will be instrumental in driving RoAAs and is a key monitorable. AUBANKs scorching growth and near-flawless execution will keep valuations sustainably higher than peers. It holds the best of two worlds NBFCs (high yielding, granular retail assets) and SFBs (rapidly expanding deposit franchise). Maintain BUY post the 4QFY19 beat. Our TP is Rs 680 (4.5x Mar-21E ABV of Rs 151).

NII grew 35% YoY (+11% QoQ) to INR3.9b (3% beat), while margins compressed further by 20bp QoQ to 5.1%. CI ratio stood at 60.0% in FY19 v/s 56.7% in the previous year. Other income grew 23% QoQ (-3% YoY) to INR1.3b, driven by an increase in core and distribution fees. Operating expenses increased 13% YoY (+9.6% QoQ) to INR3.0b, leading to a 232bp QoQ decline in the C/I ratio to 58.3%. AUM rose 51% YoY to INR242b, with strong disbursements growth in vehicle/MSME/NBFC books.

While AUBANK's growth and execution capabilities as well as its ability to quickly garner retail deposits are nothing short of spectacular, steep valuations compel us to maintain our NEUTRAL rating with a TP of ~Rs 658 (4.5x Dec-20E ABV of Rs 146). AUBANKs robust growth continued into 3Q (62/8% YoY/QoQ) driven by the retail book, as wholesale disbursals slowed. The CoF increased ~25bps sequentially while yields rose by a meager ~10bps, resulting in NIM compression. Asset quality slipped, with a 13% rise in G/NNPAs sequentially. The mgt conservatively continues to classify assets of ~Rs 940mn that are less than 90 DPD as GNPAs. Term deposit traction was inspiring (~20% QoQ), but SA was sequentially flat.

We continue to admire AUBANK's growth opportunities and execution capabilities. However, given the steep valuations, we maintain NEUTRAL with TP of Rs 641 (4.5xSept-20E ABV of Rs 142). AUBANKs 2Q performance was encouraging with robust AUM growth (66/17% YoY/QoQ), healthy other income (+19% QoQ) and relatively slower opex growth (13%). As expected, asset quality was stable with lower slippages (Rs 950mn, 2.03% ann.) and higher recoveries (Rs 570mn). While the CASA Ratio dipped QoQ (170bps), the SA accretion (Rs 4.9bn; ~3x QoQ) was promising. Further, the broad based fee growth was an additional positive.

AU Small Finance Bank Ltd Q2FY19 results Comment NII increased to Rs. 321.03 Cr in Q2FY19 compared to Rs. 286.37 Cr in Q1FY19. The NII had been increasing from Q3FY18 to Q4FY18. It displayed an erratic but increasing trend from Q3FY18 to Q2FY19.

15 October 2018 AU Small Finance Bank at INR202.2b grew 13.9%/65.6% QoQ/YoY. On book AUM (INR181.2b) was primarily led by retail AUM growth of 57.9% YoY and wholesale AUM growth of 101% YoY. The growth was driven by vehicle finance (+10.8%/47.6% QoQ/YoY), secured MSME segment (+10.7%/67.6% QoQ/YoY) and secured SME segment (-5.0%/4.

While we admire the business model and mgt's execution capabilities, rich valuations compel us to remain NEUTRAL. Our TP of Rs 667 is based on 5x Mar-20E ABV of Rs 133. AUBANKs incredible performance sustained in 1Q as disbursements/AUM grew ~91/56% YoY and asset quality improved (G/NNPAs down 88/77bps YoY). However, margins were under pressure as CoF rose and yields failed to compensate (down 20bps sequentially). The doubling of opex (YoY) is reflective of AUBANKs continued investment in people and technology.