AU Small Finance Bank has reported a 16% year-on-year growth in profit after tax (PAT) for the first quarter, reaching INR 581.00 crores. The bank demonstrated robust growth in key areas despite facing challenges in certain segments.

Strong Deposit and Loan Growth

The bank achieved impressive deposit growth of 31% year-on-year, with total deposits reaching INR 1,27,000.00 crores. This growth rate was nearly three times the system growth rate. The loan book expanded by 18% year-on-year to INR 1,17,000.00 crores, almost double the system growth rate. This growth was achieved despite a 23% decline in the bank's unsecured book.

Margin Pressure and Credit Costs

Net interest margin (NIM) compressed by 38 basis points to 5.40% from 5.80% in the previous quarter. This reduction was driven by lower asset yields and reduced investment yields. Despite the margin pressure, the bank maintained a Return on Assets (ROA) of 1.50%.

Credit costs increased during the quarter, primarily due to stress in the microfinance business and challenges in the southern mortgage portfolio. The bank revised its full-year credit cost expectation upward by 10-15 basis points to around 1% of average total assets.

Segment Performance

The retail-secured assets segment, comprising 67% of the loan portfolio, grew by 20% year-on-year. The wheels business led this growth with a 26% increase. The bank's commercial banking segment also showed strong performance, growing by 30% year-on-year.

However, the unsecured book, including microfinance and credit cards, faced challenges. The microfinance portfolio saw a decline in collection efficiency to 98.30% from 98.70% in the previous quarter.

Management Outlook

Management expects Q2 to be the bottom for margins and anticipates gradual improvement from Q3 onwards. The bank is taking measures to address challenges in the unsecured segments, including leadership changes in the credit card business and implementing new risk filters in microfinance lending.

Future Strategy

AU Small Finance Bank remains confident in its strategy and customer-centric model. The bank is focusing on expanding its distribution network, particularly in the wheels and mortgage segments. It aims to increase mortgage business growth from the current 15% to 20% in the coming years.

The bank maintains its guidance of achieving a 1.80% ROA for FY27, factoring in expected improvements in the microfinance and credit card segments.

Conclusion

While AU Small Finance Bank faces some near-term challenges, particularly in unsecured lending, its core secured lending business remains strong. The bank's management is optimistic about improvement in the second half of the fiscal year, supported by anticipated economic recovery and the festive season.

AU Small Finance Bank 's stock took a significant hit on Tuesday, falling 7.51% to Rs 735.20, marking its lowest level since June 6. This decline comes despite the bank reporting a 15.6% increase in net profit for the first quarter.

Q1 Financial Performance

The bank's net profit for Q1 rose to Rs 581.00 crore, up from Rs 502.60 crore in the same quarter last year. This represents a year-on-year growth of 15.58%. Key financial highlights for the quarter include:

• Net Interest Income (NII) grew by 6% to Rs 2,045.00 crore
• Operating profit jumped 38% to Rs 1,312.00 crore
• Total revenue increased by 21.29% to Rs 5,189.00 crore

Asset Quality Concerns

Despite the profit growth, the bank's asset quality showed signs of deterioration:

• Fresh slippages reached 3.8% of loans
• Gross Non-Performing Assets (NPA) increased to 2.47% from 2.28% quarter-on-quarter
• Net NPA rose to 0.88% from 0.74%
• Provisions surged 88.6% year-on-year to Rs 533.00 crore

The management attributed the stress to credit cards, microfinance, and commercial banking portfolios. They expect delays in the microfinance book recovery until the fourth quarter and anticipate that credit card stress will remain elevated in the second quarter.

Market Reaction and Analyst Outlook

The stock's decline marks the fourth consecutive session of losses, reflecting investor concerns over asset quality issues. Trading volume reached 3.4 times the 30-day average, indicating heightened market activity.

Among 34 analysts covering the stock:

• 19 maintain 'buy' ratings
• 7 recommend 'hold'
• 8 suggest 'sell'

The consensus price target implies a 6.1% upside potential from current levels.

Conclusion

While AU Small Finance Bank has shown robust profit growth and revenue expansion, the deteriorating asset quality has overshadowed these positive results. Investors and analysts will be closely monitoring the bank's performance in the coming quarters, particularly focusing on its ability to manage credit quality in its stressed portfolios.