Shares of AU Small Finance Bank (SFB) tanked nearly 12% in intra-day trading on Monday, closing 11.5% down at Rs 626.80 apiece on the BSE after analysts downgraded the bank’s stock and target price due to weak Q3 results.
While analysts at YES Securities downgraded the stock to “neutral” from “add” and cut price target to Rs 780 apiece from Rs 840 earlier, Emkay Global Financial Services has cut the target price from Rs 650 apiece to Rs 625 and maintained its “reduce” rating. Nuvama Institutional Equities and Kotak Institutional, meanwhile, have retained their “reduce” and “sell” rating, respectively.
AU SFB’s fresh slippages were elevated in Q3 at Rs 403 crore, higher than Rs 349 crore in Q2 and Rs 231 crore a year ago. This resulted in its gross and net non-performing asset (GNPA, NNPA) ratio rising to 1.98% and 0.68% as on December 31 from 1.91% and 0.60% in Q2, respectively.
Analysts at Emkay Global said the stress in the SFB’s credit card business is on the rise. Separately, the bank has counter-intuitively cut down its specific provision coverage ratio (PCR) to 66% amid rising stress, which it believes will need to be shored up and, thereby lead to higher loan loss provisioning going ahead.
AU SFB’s overall advances stood at Rs 67,624 crore as of December 31, of which the wheels segment accounted for Rs 20,375 crore and credit card exposure was at Rs 2,740 crore. The proposed merger of Fincare SFB with AU SFB, the brokerage said, will be return on asset (RoA) positive but managing human and tech integration and Fincare’s micro finance portfolio will be an “arduous” task.
“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 universal banking licence, we cut our TP further to Rs625/share (earlier Rs650/share), valuing the bank at 2.8x its Dec-25E ABV. We retain our ‘reduce’ rating on the stock,” the brokerage said.
Further, YES Securities lead analyst Rajiv Mehta said AU SFB’s rise in cost of funds was higher than preceding quarter, rising 20 basis points (bps) sequentially to 6.9% during Q3, while gross yield on assets fell 10 bps sequentially to 13.2% during Q3. Credit cost increased to 90 bps on the back of higher NPA addition and write-offs, essentially in the cards business.
RoA and return on equity (RoE), too, stood at a multi-quarter low of 1.5% and 12.5%, respectively, he said. The SFB’s overall deposits stood at Rs 80,120 crore as on December 31, up 31% on year.
“Stressed assets are increasing at AU SFB and valuation seems a bit stretched compared to other universal banks and NBFCs. Gross and net NPAs have risen both sequentially and year-on-year,” said AK Prabhakar, head of research at IDBI Capital. “Banks with similar asset size are trading at very attractive valuations and here you have a stock trading at an abnormal valuation and, of course, the prices will get corrected,” he said.