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Buy AU Small Finance Bank; target of Rs 680: HDFC Securities

April 24
19:24 2019

HDFC Securities’ research report on AU Small Finance Bank

AUMs grew ~52/12% YoY/QoQ, with on-book advances growing faster. VF (+43/9%), MSME (+55/14%) and Business banking (+75/22% on a small base) grew the fastest. We have built in an AUM CAGR of ~34% over FY19-21E, as growth moderates on a rising base. Deposits grew ~2.45x/32%, driven by TDs (~2.9x/40%), indicative of a credible franchise in the making. CI (~58.3%) dipped ~230bps QoQ. We expect oplev to play out over FY 19-21E, driven by slower branch adds, tech spend and sustained book growth. This is central to our thesis, helping contract C-AA by ~70bps (to ~3.51%) over FY19-21E. Headline asset quality was stable with G/NNPAs at 2.04/1.29%. The increase in GNPAs (~74/12%) was slightly disappointing, led by higher slippages (~2.63%. vs. 1.96%). The bank classified advances less than 90dpd (~Rs 1.37bn vs. ~Rs 940mn) as NPAs. Excluding these, GNPAs grew ~2% QoQ. Despite the 13% exposure to real estate and NBFCs, we are confident on AUBANK’s asset quality. We have factored in slippages of 2.1% and GNPAs at ~1.88% over FY19-21E. Margins dipped by ~15bps QoQ to ~5.25%, owing to a rise in the CoF. On a YoY basis, margins dipped ~130bps as income on securitized/ assigned loans fell. With the recent pass through in lending rates (incremental retail yields up ~70 bps), we expect NIMs to bottom out hereon. We have built in NIMs of 5.24% over FY19-21E.

Outlook

Maintain BUY post the 4QFY19 beat. Our TP is Rs 680 (4.5x Mar-21E ABV of Rs 151).

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