AU Small Finance Bank is set to benefit from a substantial weight increase in the upcoming MSCI February rejig, with the official announcement made today at 3pm. The development marks a significant milestone for the financial institution's market positioning.

MSCI Rejig Details

The MSCI February rebalancing will see AU Small Finance Bank's weight increase by a notable amount, reflecting the bank's improved market standing and performance metrics.

Market Impact

The weight increase in the MSCI index represents a positive development for AU Small Finance Bank, as higher weightings typically lead to increased institutional investment flows. Index funds and ETFs that track MSCI indices will need to adjust their holdings accordingly, potentially driving demand for the bank's shares.

This rebalancing decision by MSCI reflects the bank's enhanced market capitalization and liquidity metrics, which are key factors considered during periodic index reviews. The substantial USD 172 million weight increase demonstrates the significant scale of adjustment being made to the bank's index representation.

AU Small Finance Bank has received a credit rating reaffirmation from ICRA Limited, with the rating agency maintaining its [ICRA] AA; Stable outlook for the bank's Tier-II Bonds. The development was communicated to stock exchanges on February 26, 2026, highlighting the bank's strong financial fundamentals and growth prospects.

Rating Action Summary

ICRA Limited has taken a dual approach in its latest rating action for AU Small Finance Bank's Basel II Lower Tier II bonds:

The rating withdrawal for Rs. 856.00 crore bonds was executed at the bank's request as the instrument has been redeemed with no outstanding amount, following ICRA's policy on credit rating withdrawal.

Strong Financial Performance and Growth Trajectory

The rating reaffirmation is supported by AU Small Finance Bank's robust financial metrics and consistent growth momentum. The bank has demonstrated impressive expansion with a compound annual growth rate of around 30% in its gross loan portfolio during March 2020 to March 2025, reaching Rs. 1,29,898 crore as on December 31, 2025. Deposits increased by 37% during this period, reflecting strong customer confidence and market penetration.

Universal Bank Transition and Strategic Positioning

A significant development supporting the positive rating outlook is AU Small Finance Bank's receipt of in-principle approval from the Reserve Bank of India to transition into a Universal Bank. This transition, expected to be completed in FY2027, positions the bank advantageously in the competitive banking landscape. The bank maintains its focus on secured retail loans, which comprised 68% of the gross loan portfolio as on December 31, 2025.

The bank's established market presence spans across 2,726 touchpoints in 21 states and 4 Union Territories as on December 31, 2025. Vehicle financing and mortgage-backed micro business loans continue to dominate the retail asset portfolio, accounting for 34% and 26% respectively of the gross loan portfolio as of December 2025.

Asset Quality and Capital Adequacy

While gross non-performing assets increased to 2.3% as on December 31, 2025 from 1.7% as on March 31, 2024, primarily due to stress in microfinance and digital unsecured business segments, the overall asset quality remains comfortable with net NPAs at 0.9%. The bank's capital adequacy ratio of 19.0% (Tier I: 17.1%) as on December 31, 2025, remains well above regulatory requirements of 15.0% (Tier I: 7.5%).

Regulatory Development and Risk Factors

The rating agency noted the bank's de-empanelment for Government business in Haryana following suspected unauthorised transactions. This development will result in deposit outflow of Rs. 735 crore, though this represents only 0.4% of the bank's overall deposits as on December 31, 2025, making it non-material to overall operations.

The Stable outlook reflects ICRA's expectation that AU Small Finance Bank will sustain steady credit profile while expanding operations and maintaining healthy profitability and adequate capitalisation. The bank is expected to maintain growth momentum with gross loan portfolio scaling at 20-25% per annum over the medium term.