Buyl AU Small Finance Bank; target of Rs 875: Motilal Oswal

Motilal Oswal's research report on AU Small Finance Bank

AU Small Finance Bank (AUBANK) remains an attractive combination of growth and earnings as the bank navigates through the last leg of stress in the MFI and Cards segments. The recovery in credit cost, margins, and loan growth (led by festival demand and GST cuts) will aid earnings, while the transition to a universal bank provides a strong runway for growth. Deposit mobilization continues to remain healthy, with stable deposits forming ~79% of the total deposits. During 1QFY26, NIM contracted sharply to 5.4% but is expected to bottom out in 2Q and recover thereafter. AUBANK’s GNPA rose 19bp QoQ to 2.47% in 1QFY26; however, it expects stress to peak in 2Q. The bank has incurred 34bp of credit costs in 1Q, and we estimate 2Q credit costs to be ~30bp. This implies a sharp deceleration in provisioning expenses during 2H as management maintains its full-year guidance of 100bp.

Outlook

We estimate AUBANK to deliver 24% loan CAGR over FY26-28, which, coupled with improvement in operating metrics, will enable a 33% earnings CAGR. The recent correction in stock price has made the risk-reward favorable. Hence, we reiterate our BUY rating on the stock with an unchanged TP of INR875 (based on 2.8x FY27E BV).

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AU Small Finance Bank - 23 - 09 - 2025 - moti