Buy AU Small Finance Bank, target price Rs 800: Motilal Oswal

Motilal Oswal has maintained the buy rating on AU Small Finance Bank with a target price of Rs 800 (4 times Sep’21BV). The bank has released its business update for the fourth quarter of FY20. Gross AUM has increased 28.4 per cent year-on-year (YoY) and 4.2 per cent quarter-on-quarter (QoQ) to Rs 311.3 billion led by around 39 per cent YoY and 7.5 per cent QoQ growth in the retail book. Wholesale growth remained flat QoQ (2 per cent YoY decline) to Rs 50 billion. Thus, in the fourth quarter FY20, retail AUM constituted ~84 per cent of the total AUM (v/s 81 per cent in third quarter FY20).

Total deposits grew 34.7 per cent YoY/9.6 per cent QoQ to Rs 261.6 billion. However, CASA ratio stood at 16 per cent (v/s 17 per cent in the third quarter of FY20). The average cost of funds for FY20 stood at 7.69 per cent (v/s 7.87 per cent in FY19). On the asset quality front, gross NPAs (GNPA) increased by 2 bp QoQ to 1.9 per cent while net NPA (NNPA) declined sequentially by 4bp to 0.97 per cent. Thus, total provision coverage improved to 49 per cent (v/s 46.8 per cent in 3QFY20).

The share price of the bank moved up by 3.28 per cent from its previous close of Rs 480.30. The last traded price is Rs 496.05. Incorporated in 1996, AU Small Finance Bank has a market cap of Rs 14587.28 crore.

Investment Rationale

The bank has reported strong deposit growth numbers in an environment where the faith of depositors is already fragile. The bank has maintained strong surplus liquidity of Rs 49 billion and having a LCR of 137 per cent places it in a comfortable liquidity position. It has also reported stable growth trends in its retail portfolio despite the lockdown for a few days in March 2020. Overall, the brokerage expects FY21E loan growth to get impacted due to the outbreak of Covid-19, which will drive the slowdown in consumption-linked loans. On the asset quality front, delinquencies could increase in both vehicle/MSME portfolios over the next few quarters.

Financials

For the quarter ended December 31, 2019, the company reported standalone interest income of Rs 883.25 crore, up 9.03 per cent from last quarter Interest Income of Rs 810.13 crore and up 40.12 per cent from last year's same quarter Interest Income of Rs 630.33 crore. The bank reported net profit after tax of Rs 190.20 crore in the latest quarter.