The AU Small Finance Bank‘s share price is in focus after the Haryana State Govt dempanelled the bank over suspicious transactions. The share price has corrected 6% in the last 1 month. However, Motilal Oswal predicts significant upside for the stock going forward.
The brokerage house believes that the lender’s transition from a niche vehicle-finance NBFC into a diversified banking franchise is positioning it to become a credible universal bank.
Motilal Oswal has reiterated a Buy rating with a target price of Rs 1,250, implying around 34% upside from the current levels. Motilal Oswal says the bank’s strategic clarity, consistent execution and a set of structural triggers could sustain steady stock performance over the medium term.
Here is a detailed breakdown of Motilal Oswal’s investment rationale.
From vehicle-finance NBFC to diversified banking franchise
Motilal Oswal noted that AU Small Finance Bank has steadily transformed from a secured, vehicle finance-led NBFC into a diversified banking franchise with a broader lending mix and stronger deposit mobilisation.
While secured lending remains the core of the business, the bank has expanded into MSME, housing, microbusiness and selective unsecured lending segments. This calibrated expansion, combined with stronger deposit mobilisation, has enabled advances to grow between FY20-FY24.
The report further added that the bank has also reduced concentration risks. Vehicle finance now accounts for about 34% of the loan book, while exposure to its home state of Rajasthan has declined to about 25%, supported by expansion across multiple states and a broader product portfolio.
Dominant franchise within the SFB universe
Motilal Oswal argues that AU Small Finance Bank has emerged as the dominant franchise in the small finance bank segment. The bank’s market capitalisation exceeds twice the combined value of all SFB peers.
The lender has maintained steady net interest margins, controlled credit costs and superior profitability relative to the broader SFB universe. With its franchise, network and product capabilities already well established, Motilal Oswal believes the bank is well positioned to pursue scalable growth as it transitions to universal banking.
Universal banking transition expands growth opportunity
A key structural trigger identified by Motilal Oswal is the bank’s transition toward universal banking. The brokerage says the shift meaningfully expands the addressable opportunity across larger retail, MSME and mid-corporate segments while providing greater flexibility to optimise the loan mix. The removal of certain regulatory constraints associated with small finance banks could also help improve return metrics, the brokerage said.
In addition, a broader product suite and stronger brand recognition are expected to support cross-selling opportunities, fee income growth and talent acquisition, the report added.
Strong loan growth outlook
Motilal Oswal expects AU Small Finance Bank to continue outperforming system credit growth. In the December quarter of FY26, the bank’s loan book expanded 24% year-on-year, compared with around 14.4% growth for the banking system.
Growth has largely been driven by secured segments even as the bank has deliberately moderated exposure to unsecured lending. Secured advances grew about 23% year-on-year, while unsecured loans remained contained at roughly 7.3% of the loan book, supporting healthier asset quality.
AU Small Finance Bank currently operates 2,726 touchpoints across 21 states and four union territories, enabling branch-led loan sourcing and supporting growth momentum, the report added. Motilal Oswal estimates the loan book will expand at around 24% CAGR between FY26 and FY28.
Deposit franchise strengthening
Alongside loan growth, the bank has built a strong deposit base. Deposits have compounded at around 28% CAGR over the past three years, excluding the merger impact, crossing the Rs1 trillion mark. Deposit growth is expected to broadly track loan growth at around 23% CAGR over FY26–FY28, supported by improving branch productivity, digital onboarding and the credibility boost from the universal banking transition.
Motilal Oswal also expects a gradual shift toward higher-quality retail and CASA deposits, which could lead to a 30–40 basis point reduction in the cost of deposits over time.
Improving profitability and earnings outlook
The brokerage expects AU Small Finance Bank’s profitability to improve as operating metrics strengthen. Motilal Oswal forecasts the bank will deliver about 36% earnings growth annually on a compounded basis between FY26-FY28, supported by strong loan growth, improving operating leverage and moderation in credit costs. Return ratios are also expected to improve, with return on assets projected to reach around 1.74% and return on equity about 17.2% by FY27.
Conclusion
Motilal Oswal believes AU Small Finance Bank’s evolution into a universal bank, combined with strong loan growth, improving deposit mobilisation and expanding fee income streams, positions it for sustained earnings growth.
With loan growth expected at around 24% CAGR and earnings projected to grow about 36% over FY26–FY28, the brokerage reiterated a Buy rating.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.