Why are analysts gung ho on this small lender despite its deteriorating asset quality

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NEW DELHI: As more small finance banks are eyeing listings on Dalal Street, the leader of the pack is going down in flames. Shares of (AUSFB), among the top performers in the last financial year since the Jaipur-based lender’s listing in July 2017, have started to lose sheen in the current financial year so far.

Amongst BSE 500 shares, AU Small Finance Bank is the worst-performing stock of 2021-22 so far, after

. It has tanked 22 per cent during this period.

Between March 2020 and March 2021, it had soared over 300 per cent.

The lender’s March quarter earnings have been a mixed bag, with a deteriorating asset quality owing to a higher share of riskier segments and the resignation of its audit officer.

Also, fresh slippages of loans surged to Rs 1,244 crore in the fourth quarter of last financial year. Gross non-performing assets increased to 4.3 per cent at the end of March from 3.7% at the end of December 2020.

“AU SFB’s Q4 FY21 performance was a mixed bag with core operating metrics trending better than expected. The management sounded confident about the health of the portfolio. AUM growth though witnessed strong momentum in Q4FY21, but is likely to moderate in H1 FY22E due to covid resurgence,” said ICICI Securities.

The brokerage has assigned an ‘add’ rating to the stock, but cut its target price to Rs 1,140 from Rs 1,320.

Motilal Oswal has maintained a ‘buy’ rating on the counter considering the lender’s robust business momentum. However, it has cautioned over AU SFB’s deteriorating asset quality and elevated credit cost in the near term.

The bank reported 38 per cent growth in net profit to Rs 168.98 crore for the quarter ended March 2021 from Rs 1,223 in the year-ago period. However, on a sequential basis, it dipped 65 per cent compared with Rs 4,790 crore in the quarter ended on December 31.

The bank has posted healthy 18 per cent growth in net interest income (NII) while its non-interest income improved 51 per cent in the quarter ended March 31. Its net interest margin (NIM) eased to 5.30 per cent in the quarter ended March from 5.50 per cent in the year-ago period.

The lender’s loan book surged 22 per cent to Rs 37,712 crore by the end of March, and the CASA ratio moved up to 23 per cent.

“Factoring a higher credit cost and a lower growth in FY22 due to pandemic , our FY22/23 earnings estimates undergo material cuts. Given transient asset quality challenges, an agile and responsive growth model and attractive structural story of the bank,” said Yes Securities, which has an ‘add’ rating on the lender with a target price of Rs 1,150.

Incorporated as a vehicle finance company in 1996, AU Small Finance Bank transformed into a small finance bank in April 2017. The bank marks its presence in 15 states and 2 Union Territories, with 729 branches, 341 ATMs, 31 asset centers and about 6.6 lakh loan accounts.

Brokerage Chola Wealth is also bullish on the counter. It said that CASA growth coupled with improving disbursement yields should support NIMs in the short term. High provisions provide comfort for stress in the book, it added.

“With CE at robust levels and management’s focus to strengthen the balance sheet, the bank is better positioned to tackle the current crisis. The stock is currently trading at 3.3x P/ABV of FY23E. Assigning a P/ABV of 4x for FY23E,” added Chola, which has a ‘buy’ rating on the stock with a target of Rs 1,143.

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