Shares of AU Small Finance Bank witnessed a significant decline of over 5 percent in early trade on July 24, following the bank's release of its financial results for the first quarter ended June 30, 2023. Despite reporting a robust 44 percent year-on-year (YoY) growth in net profit, the bank faced challenges as its asset quality deteriorated during the quarter.
The bank's gross non-performing assets (NPAs) rose to 1.76 percent in Q1, up from 1.66 percent seen in the preceding quarter, indicating a potential strain on its loan portfolio. Net NPAs also moved higher to 0.55 percent from the previous quarter's 0.42 percent. This deterioration in asset quality caused concerns among investors and analysts.
AU Small Finance Bank's net interest income (NII) grew 27.7 percent YoY to Rs 1,246.2 crore, showcasing the bank's ability to increase its core revenue. However, the NII remained flat sequentially due to a 40 basis point contraction in margins, raising questions about its future profitability.
Sanjay Agarwal, the Managing Director of AU Small Finance Bank, addressed concerns about net interest margins, stating that the bank expects pressure on margins in light of the pause in interest rate hikes. However, he remained optimistic, mentioning that the bank anticipates improvements in NIMs once interest rates reverse.
The bank's subdued Q1 performance prompted a cautious outlook from various financial institutions. Foreign brokerage firm Morgan Stanley highlighted that the moderation in the lender's margin was higher than the firm's expectation. Nevertheless, the firm expects margin to pick up from the second half of the fiscal year, along with strong loan growth, which will drive compounding for the lender.
Motilal Oswal Financial Services fine-tuned its estimates post the lender's subdued results and now expects the bank to deliver a 28 percent earnings CAGR (Compounded Annual Growth Rate) over FY23–25, with RoA (Return on Assets)/RoE (Return on Equity) of 1.9 percent/17.4 percent in FY25E. The firm maintains a 'neutral' stance on AU Small Finance Bank, with a price target of Rs 810.
On the other hand, Kotak Institutional Equities (KIE) emphasized the lender's expensive valuation, prompting the firm to assign a 'sell' call for the stock. KIE has a target price of Rs 600 for the stock, reflecting a downside potential of around 22 percent from the previous close.
KIE also believes that AU Small Finance Bank's premium valuation is a result of its consistent execution capability seen in the past few years. However, the firm acknowledges that the bank may now face challenges in differentiating itself from peers on both operating and asset-quality metrics, narrowing the gap that once set it apart.
Investors and market participants are closely monitoring the bank's performance and asset quality management. The recent performance has raised concerns, and the management's strategic actions to address these issues will be crucial in maintaining investor confidence. As the fiscal year progresses, the bank's ability to navigate these challenges will be a key factor in determining its performance and future prospects.
At 10.18 am, shares of AU Small Finance Bank were trading at Rs 734.40 on the National Stock Exchange, reflecting a cut of 4.4 percent from the previous close. Market participants are advised to exercise caution and carefully evaluate the bank's financials and plans before making any investment decisions related to AU Small Finance Bank.
