AU Small Finance Bank (AU) has displayed excellent execution capabilities while migrating to the SFB platform from the NBFC model.
AU Small Finance Bank (AU) has displayed excellent execution capabilities while migrating to the SFB platform from the NBFC model. Notably, it has not compromised on growth and has contained transition costs (chart 2). Even when SIAM forecasts single-digit growth for pan-India auto sales in FY20 (vehicle portfolio contributes 42% to AU’s total AuM, of which new vehicle finance share accounts for 70%), AU has maintained its growth plans and aims to grow AuM by 30% over next couple of years.
Our calculations suggest that 1,30,000 loan account additions per year with current average ticket size of `700,000 would enable AU to achieve 30%+ Vehicle AuM CAGR between FY19-FY21E. The bank added net 1,37,000 loan accounts during FY19 by adding only 17 customer touch points during the year. We downgrade to ‘add’ (earlier ‘buy’) with unchanged target price of `780, valuing at 5.2x Sep-20 BV.
Post the conversion into SFB, AU has constantly worked on smoothening the overall business process and using technology to the maximum extent possible to improve productivity. Key initiatives it has implemented over the past couple of years are: a) completely paperless deposit and withdrawals at branches, thus reducing transaction time for customers (it also enables AU to cross-sell products); b) appointing separate manpower at branches to service customers, enabling branch managers to only focus on generating business; c) tapping unbanked pockets of the rural population, it started accepting cash to open new saving accounts with on-the-spot deposit acceptance confirmation via SMS.
Currently on-book AuM stands at `22,900 crore with vehicle finance contributing 42% (of which, new vehicle finance contributes 70%). MSME and wholesale segments contributes 32%/17% respectively while balance 9% contributed by series of newly launched products like gold loan, housing loan, OD against FD, agri, MSME, etc.
Broadly, retail segment share stands at 82% while wholesale assets contribute 18%. Management sounded confident about sustaining total business growth rate at >30% over next couple of years. Loan mix is expected to remain static at current levels, notably within vehicle finance, but AU is planning to incrementally grow the used vehicle book faster than new vehicle.