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MOSL: AU SMALL FINANCE BANK (Buy)-Asset quality holding stable-Margin trajectory set to improve

AU SMALL FINANCE BANK: Asset quality holding stable; Margin trajectory set to improve

(AUBANK IN, Mkt Cap USD2.8b, CMP INR660, TP INR760, 15% Upside, Buy)

 

• AUBANK reported 1QFY20 PAT at INR1.9b (+61% QoQ), aided by pre-tax gains of INR770m from the 0.8% stake sale in Aavas Financiers Ltd. Excluding the stake sale gains, PAT came in at INR1.19b (v/s our est. of INR1.10b).
• NII grew 38% YoY (2% QoQ) to INR3.9b (5% miss to our est.). Excluding one offs, other income grew 30% YoY to INR2.1b (significantly ahead our est.). Operating expenses grew 33% YoY (4.6% QoQ) to INR3.2b (our est. INR3.2b). C/I ratio adjusted for stake sale gain increased 130bp QoQ to 59.6%.
• Bank's gross AUM grew 44% YoY to INR256b led by 49%/36% growth in the retail/wholesale book. Within the retail book, wheels/MSME book grew 40%/50% YoY and formed 42%/33% of the overall AUM. Total disbursements grew 40% YoY to INR40b, led by 42%/34% YoY growth in the retail/wholesale book.
• Deposits grew 99% YoY to INR198.5b, led by 112% YoY growth in term deposits. CASA ratio declined 200bp QoQ to 19% as CA deposits decreased 29% QoQ. AUBANK mobilized ~INR8.5b of retail TD; thus, CASA plus retail TD stood at ~46%.
• Slippages for 1QFY20 stood at INR1.4b (3.7% annualized) whereas reductions came in at INR1.2b. Absolute GNPLs increased 3.3% QoQ while NNPA declined 1.9% sequentially. Thus, GNPA ratio increased marginally by 4bp (2.08%) while NNPL ratio declined by 4bp QoQ to 1.25%. PCR increased ~310bp to 40.5%.
• Concall highlights: (a) Securitized AAA rated vehicle portfolio of INR13.4b. (b) Increased focus on the used vehicle/cash-on-wheels segment. (c) Bank has moved to daily recognition on the overall portfolio.
• Valuation and view: AUBANK is swiftly increasing its focus towards high- yielding used vehicle segment and is capitalizing on under-penetrated opportunities in the MSME segment, thereby sustaining healthy growth momentum. Further, the conservative underwriting approach, reduction in ticket sizes and lower LTVs should enable the bank to maintain strong control on credit costs. We expect AUBANK to deliver steady 43% earnings CAGR over FY19-21, aided by gradual improvement in operating leverage and margins. Maintain Buy with PT of INR760 (4.8x FY21E BV).