AU Small Finance Bank Ltd Research Report By IIFL

AU Small Finance Bank (AU SFB) remains a play on industry leading loan growth, successful build up in liability franchise due to its banking license, lowering cost to income ratio and contained credit cost. Decline in funding costs as deposits build up, improving fee income due to cross-sell opportunities, operating leverage benefits and lower loan loss provisions will drive the bank’s return ratios.

We expect RoE to improve from 14.1% in FY19 to 17.1% in FY21E.

Strong loan growth of ~35% CAGR over FY19-21E

We forecast the bank’s loan book to grow at ~35% CAGR over FY19-21E to ~Rs41,500cr. Its asset growth will be driven by both retail and wholesale loans. The key drivers of retail loans will continue to remain vehicle finance (42.1% of FY19 AUM) and MSME & SME (35.5% of FY19 AUM).

These segments are well established in terms of scale, well laid sourcing, processing and collection infrastructure. Further, new products (1.7% of FY19 AUM) viz. gold loans, consumer durable loans, agriculture-SME and 2-wheeler loans will grow fast on a lower base.

Within wholesale loans, NBFC funding and business banking will be high growth segments, as in real estate segment the bank is selective. The bank’s higher capital adequacy ratio (19.3%) will also support loan growth.

Outlook & Valuations:

We estimate AUM and PAT CAGR of ~35% and ~44% respectively over FY19-21E. This translates to FY21E RoA of 1.6% and RoE of ~17%. Though the stock is trading at ~3.8x FY21E P/BV, premium valuations are justified on the back of healthy ROE and better asset quality despite higher long growth. We value the stock at 4.5x FY21E P/BV and arrive at the target price of Rs741, implying an upside of 17% on CMP.