Strategic Growth and Future Horizons: An Analysis of AU Small Finance Bank

Company Overview

AU Small Finance Bank, formerly an NBFC, commenced operations as a small finance bank in 2017, targeting underserved demographics. Since its conversion, the bank has demonstrated robust growth and financial performance, consistently expanding its asset base, loan book, and deposit franchise. With a diversified loan book, growing branch network (increasing from 398 branches in FY2018 to 898 branches as of FY2023), and a focus on semi-urban and rural areas, AU SFB has established itself as a key player in the small finance bank segment. This report analyzes the bank's historical performance, strategic initiatives, and valuation outlook, providing a comprehensive perspective for potential investors on how AU SFB is well-positioned to capitalize on the growth opportunities in the Indian banking sector.

Asset Growth and Loan Book Expansion

AU SFB has exhibited strong asset growth, with its total assets growing from INR 14,976 Cr in FY2018 to INR 44,503 Cr in FY2023, reflecting a CAGR of 24.7%. The bank's loan book has also expanded from INR 11,660 Cr in FY2018 to INR 35,713 Cr in FY2023, registering a CAGR of 25.1% during the same period, driven by diversification across retail, MSME, and wholesale lending segments.

Deposit Mobilization and Profitability

The bank has successfully grown its deposit base, increasing from INR 9,025 Cr in FY2018 to INR 32,239 Cr in FY2023, representing a CAGR of 29.1%. AU SFB has focused on building a granular deposit franchise with a healthy mix of CASA and term deposits. The bank's net profit has increased from INR 278 Cr in FY2018 to INR 1,070 Cr in FY2023, reflecting a CAGR of 31.1% during this period, supported by improvements in net interest margins, fee income, and operating efficiency.

Asset Quality and Capital Adequacy

AU SFB has maintained stable asset quality, with Gross NPAs of 2.4% and Net NPAs of 1.3% as of FY2023. The bank has strengthened its risk management practices and provisioning coverage over the years. With a Capital Adequacy Ratio of 20.8% as of FY2023, AU SFB maintains a strong capital position, well above the regulatory requirement of 15%.

Industry Outlook

The Indian banking sector is poised for a new growth phase, supported by anticipated 25 bps rate cuts by the RBI in the second half of FY2025, which is expected to boost profitability through reduced borrowing costs and higher loan demand. A CRISIL report projects a CAGR of 12-14% for the sector through FY25, indicating a favorable environment for AU SFB's growth strategy.

Strategic Initiatives

AU SFB has outlined several strategic initiatives to drive growth and profitability:

1. Targeting a 23-25% CAGR in deposits over FY2024-27E, with commensurate asset growth.

2. Enhancing the proportion of high yield-high RoA products like Wheels, MBL, and Fincare products to 72-75% by FY27E.

3. Capping MFI and unsecured loans to bolster asset quality post-merger of Fincare SFB, with a projected Provision Coverage Ratio (PCR) in the range of 65-70%.

4. Achieving 65% branch profitability by FY27E through strategic CASA deposit growth, cost optimization, and cross-selling enhancements.

5. Aiming for a 1.8% RoA by FY2027E by leveraging merger synergies for improved Net Interest Margins (NIMs), fee income growth, and operational efficiencies.

Financial Analysis

Valuation and Recommendation

Based on AU SFB's strategic growth initiatives, robust financial health, and the favorable outlook for the Indian banking sector, we value the stock at 2.5x FY2027E Adjusted Book Value (ABV). Our target price of INR 798 implies a potential upside of 36% over the next 18 months. We recommend a "Buy" rating for AU Small Finance Bank, considering its strong fundamentals and attractive growth prospects.

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