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MOSL: AU SMALL FINANCE BANK (Buy)-Stellar performance; return ratios improving steadily

(AUBANK IN, Mkt Cap USD4.2b, CMP INR975, TP INR1100, 13% Upside, Buy)

Asset quality stays pristine
** AUBANK delivered stellar performance with an improving trend across key metrics (AUM growth, NIMs, opex & asset quality). 3QFY20 PAT thus grew 100% YoY driving FY20E RoE to best-in-class levels of 20% (despite warrant conversion).

** Growth/profitability outlook remains strong as bank benefits from its long retail expertise of NBFC performance and benefits from strong built up of liability franchise. This will thus drive further improvement in return ratios.

** We estimate earnings over FY20-22E to grow at avg. 40% (after 98% YoY growth during FY20E, including Aavas stake sale) led by continued margin expansion and improvement in operating leverage. We increase our EPS estimate for FY21/FY22 by 12%/19% and maintain our Buy rating.

Strong overall performance; PAT grows 100% YoY
** PAT increased 100% YoY to INR1.9b (v/s est. INR1.8b), aided by strong operating performance. RoA for the quarter stood at 2.1%. NII grew 46% YoY (+12% QoQ; 4% beat). Operating expenses grew 29% YoY while C/I ratio declined ~70bp QoQ to 53.2%.

** Gross AUM increased 37% YoY led by 46% YoY growth in the retail book while wholesale book grew ~8% YoY. Within retail book, Wheels/ Secured MSME book grew 33%/51% YoY and formed 42%/35% of the overall AUM. Retail AUM formed ~81% of the total AUM (v/s 79% in 2QFY20).

** Deposits grew 63% YoY to INR239b led by 84% YoY growth in time deposits. CASA ratio (excluding CD) stood at 17%. Retail SA formed ~81% of the overall SA deposits while retail TDs formed ~37% of the total term deposits.

** Fresh slippages stood at INR1.3b (2.6% annualized); absolute GNPLs were flat while NNPAs declined 5% QoQ. PCR improved ~300bp QoQ to 46.8%.