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MOSL : AU SMALL FINANCE BANK: Operating performance in line; margins expand sequentially . AU SMALL FINANCE BANK: Operating performance in line; margins expand sequentially (AUBANK IN, Mkt Cap USD5b, CMP INR6

.  AU SMALL FINANCE BANK: Operating performance in line; margins expand sequentially

(AUBANK IN, Mkt Cap USD5b, CMP INR626, TP INR700, 12% Upside, Buy)

Lower provisions drive earnings beat

• AUBANK posted 23% YoY growth in net earnings (9% beat) led by lower provisions in 2QFY23. However, operating profit came in line with healthy NII growth aided by 30bp QoQ margin expansion to 6.2% during the quarter.
• Gross advances grew strongly at 44% YoY, and deposits rose 49% YoY with healthy traction in CASA deposits. CASA ratio thus improved to 42%.
• The absolute amount of GNPA/NNPA increased 3%/5% QoQ, respectively. However, headline GNPA ratio improved 6bp QoQ to 1.90% while NNPA ratio stood flat at 0.56%. PCR ratio was broadly stable at 71.1% in 2QFY23.
• We largely maintain our estimates as higher NII and lower provisions get offset by higher opex, due to sustained investments in building the franchise. We estimate AUBANK to deliver 25% earnings CAGR over FY22–24 with an RoA/RoE of 1.8%/14.9% in FY24E, respectively. We maintain our BUY rating, with a TP of INR700 (premised on 3.7x FY24E BV).

 

Healthy traction in deposits; restructuring book stands at 1.7% of loans

• AUBANK reported 23% YoY growth in PAT to INR3.4b (9% beat) driven by lower provisions that came in at INR430m v/s estimate of INR610m. For 1HFY22, NII/PPoP/PAT grew 39%/2%/27% to INR20.6b/INR8.9b/INR6.1b, respectively.
• NII rose 44% YoY to INR10.8b (6% beat), supported by 44% YoY growth in advances and 30bp QoQ margin expansion to 6.2%. Core fee income grew 64% YoY (15% QoQ) in 2QFY23.
• Opex rose 51% YoY as the bank continues to invest in building the franchise. However, C/I ratio moderated 280 QoQ to 62.5%. PPoP grew 27% YoY to INR5.0b (3% beat) in 2QFY23.
• Gross advances increased 44% YoY to INR525b (+6% QoQ), led by healthy traction in wholesale book that rose 12% QoQ v/s 3% QoQ growth in retail loans. On a sequential basis, disbursements grew 2% to INR86b.
• Total deposits jumped 49% YoY to ~INR583b, with SA growing 113% YoY to INR218b. The CASA ratio improved to 42% in 2QFY23 from 39% in 1QFY23.
• GNPA/NNPA increased 3%/5% QoQ, respectively. However, headline GNPA ratio improved 6bp QoQ to 1.90% while NNPA ratio stood flat at 0.56%. PCR ratio was broadly stable at 71.1% in 2QFY23.
• O/s restructured portfolio declined to INR8.95b corresponding to 1.7% of advances (v/s 2.1% in 1QY23). The bank has been carrying provisions of INR1.5b (17%) on the restructured book.

Highlights from the management commentary

• The bank has raised FD rates by upto 60bp for retail deposits taking the peak FD rate to 7.5%. Cost of SA deposits stood at ~5.5%.
• Overall, loan growth could be in the range of ~27-30% for FY23E.
• Asset quality of the book originated post-pandemic remained pristine. About 77% of the total book has originated post-pandemic with GNPA of 0.55%.
• Slippages from the restructuring book came in at ~INR580m.