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AU Small Finance Bank shares slump 9% on earnings miss

AU Small Finance Bank shares slumped by 9 per cent on Monday as brokerages said the bank’s asset quality deteriorated further.

New Delhi, Jan 29,2024:  AU Small Finance Bank shares slumped by 9 per cent on Monday as brokerages said the bank’s asset quality deteriorated further.

AU Small Finance Bank was down 9 per cent at Rs 644 on BSE.

Despite stable NIMs due to increased interest income on securitisation and higher fees including cards, AU SFB reported 14% miss on earnings with PAT at Rs 3.8 billion as provisions accelerated to Rs1.6 billion due to rising stress in its VF and now even seasoning card portfolio, Emkay Global Financial Services said in a report.

Fresh slippages were elevated at 2.9% of loans (Rs 4 billion) due to which GNPA ratio jumped 7bps QoQ to 2% for the third quarter in a row, indicating rising stress.

The bank expects credit card book to break-even in FY25, but we believe rising asset-quality stress in cards for seasoned players like SBIC, RBL and so on indicates that stress could remain elevated for AU SFB as well, the report said.

Separately, the bank has counterintuitively cut down its specific PCR to 66% amid rising stress. We believe the merger with Fincare prima-facie could be EPS/BVPS/RoA positive, but we reckon managing HR/tech integration and MFI portfolio management will be an arduous task. Separately, we believe rising asset-quality stress in the bank’s card portfolio and VF portfolio could keep provisions elevated, the report said.

Thus, we cut our earnings estimates by 7-10%. Factoring in RoA/RoE moderation, rising asset-quality risk, likely merger drag, and potential delay in the universal banking licence, we cut our TP further to Rs 625/share (earlier Rs 650), valuing the bank at 2.8x December-25E ABV, the report said.

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