In a short span of time, AU Small Finance Bank has registered significant growth across all major parameters and has consistently remained ahead of the curve thanks to its extensive understanding of the business cycle and customer segments, domestic brokerage house Samco Securities said in a note.
The stock has risen 31 percent in the last 1 year and 34 percent in 2022 YTD even amid volatility on the back of rising inflation, monetary tightening, continued foreign outflows, etc.
The brokerage has a 'buy on dips' recommendation for the stock with an investment horizon of 3 years.
As per the brokerage, the bank's strategy of building a granular, retail liabilities franchise with a major focus on technology will continue to leverage its brand outreach.
The bank’s stupendous financials in comparison to its peers continue to reward the shareholders, it stated, adding that the lender is progressing towards an enduring future as it aspires to become a universal bank in the foreseeable future which will unlock new opportunities for the bank.
Small is the new big: AU Bank is India’s largest Small Finance Bank by asset size, noted the brokerage, stating that its AUM has risen at 32.5 percent CAGR over FY18-21.
"The bank has leveraged its deeper geographic presence in semi-urban and rural India to successfully reach out to unserved and underserved segments of society, such as MSMEs, and ensure consistent delivery of credit and essential banking services. The company is expanding its footprint to establish a pan-India presence, allowing them to gain business momentum and volumes faster," it highlighted.
Robust financial performance: The lender has also maintained an impressive and robust balance sheet along with healthy liquidity and strong risk management measures, the brokerage noted. Despite the pandemic, the bank emerged stronger since it has healthy capitalization levels with its Capital Adequacy Ratio at 23.4 percent during FY21, it noted.
Moreover, it has delivered an average ROE (return on equity) of 19.4 percent over the past 3 years and has consistently increased its profitability during the same period supported by growth in its Net Interest Income and a decline in the cost of funds, Samco informed.
Focus on becoming a tech-led bank: Another positive for the lender is that it has been investing in best-in-class technology to build a future-ready bank with a major focus on retail assets and liabilities, said Samco. To reap the benefits of the prospects offered by digital, the company recently launched its digital bank – AU 0101, designed to match the high expectations of a new-age bank. AU Bank is well-capitalized to scale tech-based solutions and use technology as a growth catalyst, noted the brokerage.
Excellent Asset quality: The brokerage further informed that vehicle finance and secured business loans (MSME and SME lending) continue to account for 80 percent of the company’s AUM. Despite catering to bottom-of-the-pyramid customers, AU Bank’s asset quality has been top-notch, it added. As per Samco, the main drivers for the bank’s stable asset quality include strengthening underwriting practices and risk management, as well as enhancing collection efficiency.
"The company has a stellar track record of delivering growth while maintaining healthy asset quality. In fact, the assets portfolio was one of the best in the industry during the covid pandemic as its Gross NPA remained well in control at 2 percent as of FY22. Financing income-generating assets with small ticket size loans generate a secured loan book for the bank," said the brokerage.
Growing in the right direction: AU bank has grown its book strategically by focusing on a high-yield asset portfolio, fuelled by the retail segment, highlighted Samco. Further, the bank is consistently focused on building a diversified loan portfolio across product segments, it added.
Eyes Universal Banking status: Being a small finance bank, the company intends to achieve a major milestone in the larger banking area by getting the universal banking status in the near future, with the goal of serving all sectors and segments of the economy, noted Samco. The transition would help the bank to increase its offerings to wholesale, retail, and investment banking under one roof, thereby propelling the bank’s journey to expand the loan portfolio, it further said.
Now let's take a look at the key risks:
Low CASA book: Although the bank has started chasing ‘quality over quantity’ with a special focus on growing its CASA book, its CASA deposit base at 37 percent still remains lower than the banking sector average of 40-60 percent, informed the brokerage. A lower CASA book poses a risk for the company since it may raise the cost of financing and cause a dent in the Net Interest Margin improvement, leading to a negative impact on profitability, cautioned Samco. However, the bank remains confident about increasing its CASA book with pace, it added.
2. Attrition remains the key challenge: Another key concern is the high attrition at the top management levels of the bank, triggered by the series of resignations in audit/risk functions in the recent past, said Samco. This raises a question mark over the transparency of the company’s book, however, the bank reassured the investors that the reason for attrition is related to geographical issues rather than cultural ones. Nonetheless, the company’s ability to manage attrition will be the key monitorable in the future, it noted.
AU Small Finance Bank has an experience of over 25 years in the lending space. It transformed from being a finance company in 1996 to a bank in 2017. The company has expanded its spectrum of offerings over the past 4 years by entering into segments like home loans, gold loans, consumer financing, etc.
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