AU Small Finance Bank Q3 Review: Earnings Hit, Asset Quality Slips

January 29, 2024
1 min read


– AU Small Finance Bank reported a decline in profit after tax of Rs 3.75 billion in Q3 FY24 due to higher provisions compared to the previous year.
– Net interest income grew 15% YoY to Rs 13.25 billion, while net interest margins contracted 6 basis points QoQ.
– The bank’s gross/net non-performing assets increased, leading to a deterioration in asset quality.

AU Small Finance Bank Ltd. experienced a decline in profit after tax for Q3 FY24, primarily due to higher provisions. The bank reported a profit of Rs 3.75 billion, down 4% YoY and missing expectations by 10%. Net interest income, however, grew 15% YoY to Rs 13.25 billion, in line with expectations. The net interest margins contracted by 6 basis points quarter-on-quarter to 5.5%.

Despite the decline in profit, the bank’s pre-provision operating profit increased by 18% YoY to Rs 6.6 billion. However, operating expenses also increased by 25% YoY, leading to a higher cost-income ratio of 63% compared to 61.3% in Q2 FY24.

AU Small Finance Bank recorded a 20% YoY growth in advances, mainly driven by growth in the wholesale book. Deposits also grew strongly by 31% YoY, led by term deposits. However, the card business experienced a negative surprise, with a surge in delinquencies and provisioning expenses.

The bank’s asset quality deteriorated in Q3 FY24, with gross non-performing assets (NPA) increasing by 7.6% and net NPA increasing by 18.6% quarter-on-quarter. This led to an increase in the headline GNPA/NNPA ratios to 1.98%/0.68%, respectively. Credit costs also increased to 0.62%. Excluding credit cards, the net credit cost normalized at 0.44%.

As a result of the bank’s performance, Motilal Oswal has decreased its estimates for FY24E/FY25E EPS by 6-7%. The research agency also estimates a return on assets of 1.7% and a return on equity of 15.7% for FY25. However, they retain a “Buy” rating on the stock with a target price of Rs 800, based on a 3.4 times September-25E book value.

Overall, AU Small Finance Bank’s Q3 results were impacted by high provisions and a deterioration in asset quality. Despite these challenges, the bank’s disbursement growth remained healthy, but the growth rate of on-balance sheet advances was affected by high securitization.

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