AU Small Finance Bank Q4 review: Great execution & good outlook

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AU Small Finance Bank ended the year on a good note with a strong performance in Q4 FY19. While overall profit grew 42% year-on-year, it was well supported by 62% surge in net interest income (the difference between interest income and expenses), moderation in costs and lower provision.

The balance sheet is still relatively small suggesting that there is enough headroom for growth without getting impacted by broader macro headwinds. Given the strong management team, diversified asset book, focus on garnering low-cost liability and earnings potential from cost moderation, we see the company as a good long-term play that is likely to outperform most competitors in the medium term and hence an ideal pick in a volatile market.

Key positives

Business growth remained robust with assets under management surging 50% to Rs 24,246 crore, driven by both retail as well as small and mid-corporate loans. The company has maintained this robust asset growth trajectory over the last many quarters.au1

Source: Company

Asset growth has been well supported by strong growth in disbursement. In FY19, disbursement grew 49% at Rs 16,076 crore. In the quarter under review, disbursement grew by close to 20% to cross Rs 5,000 crore.

While asset growth has been robust, as the book gets diversified, the key to maintaining high profitability lies in garnering relatively lower-cost liability. In the past one-year, deposits have grown 2.5 times to touch Rs 17,079 crore. Interestingly, absolute growth in deposits in the past year has exceeded growth in assets and the share of deposits in total funding has risen to 61% from 43% a year back.

The management has succeeded in maintaining interest margin, thanks to stability in yield on assets and cost of funds, despite the rather challenging funding environment in recent times. Given that the yield on the incremental assets financed by the bank is trending up, we do not expect any imminent pressure on interest margin.

While growing at a very healthy pace, the bank hasn’t on-boarded incremental risk. The ratio of risk weighted assets-to-total assets has in fact declined to 59% from 63% a year back.

The bank had been reporting relatively high cost-to-income ratio as it had up-fronted expenses on conversion into a bank from an NBFC. With the leveraging of investment, C/I ratio is expected to moderate, which should be a kicker for earnings growth. The signs of the same was visible in the quarter under review with the C/I ratio declining to 58% from 61% in Q3.

AU Small Finance Bank has a healthy capital adequacy ratio of 19.3% that should take care of the robust growth that the management is planning in the medium term.

Key negatives

Asset quality has shown no apparent deterioration with reported gross and net NPA at 2% and 1.3%, respectively, at the same level as the previous quarter. However, slippage, i.e. addition to the pool of NPA, was sequentially much higher at Rs 152 crore (as compared to Rs 103 crore in the previous quarter).

While the management’s focus has been on garnering deposits, the share of low-cost deposits (CASA) has fallen to 21% from 24% in Q3.


The stock (April 23 closing price: Rs 607, market capitalisation: Rs 17,746 crore) is down almost 19 percent from its 52-week high and 12 percent lower than the level at which Temasek had picked up equity in the company last June.

While the valuation at four times FY21 estimated book looks expensive, if the growth journey continues, the stock is likely to mimic the earnings trajectory, which we expect to be upwards of 30 percent in the next couple of years.