MOSL: AU SMALL FINANCE BANK (Buy)-Growth momentum robust-operating leverage remains key earnings driver

AU SMALL FINANCE BANK: Growth momentum robust; operating leverage remains key earnings driver

(AUBANK IN, Mkt Cap USD2.5b, CMP INR618, TP INR740, 20% Upside, Buy)

• AUBANK’s PAT increased 34% YoY (+19% QoQ) to INR0.91b, in line with our estimate of INR0.92b. NII grew 46% YoY (+12% QoQ) to INR3.2b (5% beat), led by robust business growth. Other income rose 32.4% YoY (+18.9% QoQ) to INR1.2b (in-line). Opex increased 59% YoY (13% QoQ) to INR2.7b, leading to a CI ratio of 60.5% (-37bp QoQ). Our full-year estimate suggests AUBANK should deliver PAT of INR2.29b in 2HFY19 (after INR1.68b for 1HFY19).
• The bank's gross AUM grew 66% YoY to INR202b, with strong disbursement growth across segments. Retail assets comprise 80% of gross AUM. Retail and wholesale AUM grew 12.8% and 27.4% QoQ, respectively. Wheels/secured MSME/secured SME formed 42.3%/29.9%/4.1% of total retail AUM.
• Deposit base increased sharply to INR128.7b, taking the CD ratio to ~140.8%. CASA ratio moderated further to 26%. CASA + retail TD now forms 47% of the total liability franchise. The bank's average cost of funds stood at 7.8% for 2QFY19 (v/s 8.6% in 2QFY18). Incremental cost was at 7.3% for 1HFY19.
• Absolute GNPLs/NNPLs increased 11%/10% QoQ to INR3.7b/INR2.3b. GNPL/NNPL ratios, thus, declined 14bp/10bp QoQ to 2.0%/1.3%. Provisions declined 15% YoY to INR350m, while PCR improved 75bp QoQ to 37.6%.