Buy AU Small Finance Bank; target of Rs 675: Motilal Oswal

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Motilal Oswal 's research report on AU Small Finance Bank

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 April’20 v/s INR36b as of 1st Mar’20. 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. Margins were stable on a sequential basis despite excess liquidity buildup, with management suggesting spreads would improve further. We cut our earnings estimate for FY21/22 by 18%/10% as we factor in high credit cost and moderation in business growth. Maintain Buy.

Outlook

We estimate loan growth trends to remain soft at 15% in FY21 (20% AUM growth), while credit cost would increase to 1.7% in FY21E, as we build in higher slippages, driving an 18%/10% cut in our FY21/FY22 earnings. We thus revise our TP to INR675 (3.5x FY22E BV). Maintain Buy.

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