AU Small Finance Bank shares slip over 4% despite highest-ever quarterly profit; here’s why

Shares of AU Small Finance Bank dropped 4.43 percent on Wednesday, a day after the announcement of its highest-ever quarterly profit of ₹425 crore for Q4 (fourth quarter) FY23.

Despite the increase in profits of 23 percent year-on-year and 8 percent sequentially, investors were not enthused by the results, leading analysts to suggest that the stock valuations are too high and that the risk-reward is better in other stocks.

During Wednesday’s trade, the stock opened at a price of Rs. 649.15 per share against the previous close of Rs. 660.15 per share and fell further to touch an intraday low of Rs. 630.85. At 11:40 a.m., it was trading at Rs. 636.25, down by 3.62 percent on the NSE.

The stock touched a 52-week high of Rs. 712 on April 29, 2022 and a 52-week low of Rs. 539 on July 15, 2022.

The stock has shown an increment of over 12 percent in the past one month. Moreover, the shares have surged almost 10 percent in the last six months. In the past one year, the stock has gained nearly 75 percent.

On Tuesday, the lender announced that its net profit for the full financial year 2022-23 stood at ₹1,428 crore, a 26 percent year-on-year increase.

The bank's asset quality also improved, with gross NPA at 1.66 percent in March 2023, compared to 1.98 percent in March 2022, and net NPA at 0.42 percent of net advances in March 2023, compared to 0.50 percent in the year-ago period.

The bank's total balance sheet grew by 31 percent year-on-year to ₹90,216 crore, and deposits grew by 32 percent year-on-year to ₹69,365 crore.

"Amidst a difficult market, we have managed to grow our deposit book while keeping our CASA ratio stable and making our deposits more granular and retail. Our asset quality has also improved further this year with net NPA coming down to 0.4 percent," said Sanjay Agarwal, MD & CEO of the bank.

Global brokerage Nomura downgraded the stock to 'Neutral' with a revised target price of Rs. 630. The bank reported a healthy 1.8% return on assets and 15.5% return on equity in FY23, however, its expensive valuation of 3.5x book value and 26x P/E rate leave limited upside potential, it said.

Motilal Oswal has given a 'Buy' rating on AU Small Finance Bank with a target of ₹760. The rating is supported by the bank's in-line quarterly performance, which was supported by lower provisions and tax reversals. However, the operating performance saw a slight miss with margins moderating sequentially.

The board of directors of the bank has recommended a dividend of 10 percent of the face value ( ₹1 per equity share) from the net profit for the financial year ended March 2023. The recommendation is subject to the approval of shareholders.

AU Small Finance Bank Limited is an India-based non-deposit accepting non-banking financial company (NBFC-ND). The company is engaged in providing a range of banking and financial services including retail banking, wholesale banking and treasury operations and other services.

According to a MintGenie poll, 23 analysts on an average have a ‘BUY’ call on the stock.