MOSL: AU SMALL FINANCE BANK (Neutral)-Deposit growth surprises positively-SFB transitioning cost has likely peaked out

AU Small Finance Bank: Deposit growth surprises positively; SFB transitioning cost has likely peaked out

(AUBANK IN, Mkt Cap USD2.9b, CMP INR657, TP INR705, 7% Upside, Neutral)

• Earnings continue to gain traction: AUBANK reported 16% QoQ growth in net profit to INR789m (9MFY18: INR2.09b), led by healthy NII/other income growth. Total revenue rose 57% YoY, which enabled 6% QoQ growth in operating profit, despite a steep rise in operating expenses (+146% YoY). The bank appears to be on track to close FY18 with flattish earnings growth (adjusted), despite absorbing significant cost of banking transition.
• Incremental cost of funds on a downtrend: Calculated margin shrunk 16bp QoQ, led by a 40bp QoQ fall in lending yields, even as funding cost fell 20bp QoQ to 8.6% (7.2% incremental funding cost in 9MFY18, with cost of deposits at 6.55%). Cost-income ratio rose 322bp QoQ to 57.1% (9MFY18: 53.7%), and management suggested that C/I ratio will peak out in FY18 at ~55%.
• Strong traction in deposit mobilization: Business growth held robust, with on-book advances growing 67% YoY to INR100.3b, while total AUM grew 38% YoY to INR134.2b. However, it was deposit growth of 88% QoQ that surprised us positively. CASA mix was also healthy at 37% (+400bp QoQ), led by 130% QoQ growth in savings deposits. Total deposits now form ~37% of total credit v/s 23% in 2QFY18. AUBANK highlighted that 89% of its deposits come from new customers, while the granularity of these deposits also stands healthy, with average SA ticket size of INR40,000.