Shares of AU Small Finance Bank Ltd. experienced a significant decline of 9.46 percent, trading at Rs 845.65 on Monday, following the announcement of its second-quarter (Q2 FY27) earnings over the weekend.
Key Performance Indicators and Brokerage Concerns
Nuvama Institutional Equities noted that while AU Small Finance Bank reported a robust 25 percent year-on-year (YoY) growth in assets under management (AUM), its net interest margin (NIM) saw a 10 basis points (bps) contraction quarter-on-quarter (QoQ) to 5.8 percent. This contraction was primarily attributed to an increase in the cost of funds (CoF).
Despite the NIM pressure, lower provisions helped the small finance lender achieve an in-line profit after tax (PAT) of Rs 860 crore, with a return on assets (RoA) of 1.7 percent. However, slippages rose to 3.3 percent of loans, driven by seasonal stress in the tractor finance segment. Nuvama also highlighted a reduction in the specific provision coverage ratio (PCR) to approximately 60 percent as a point of concern. The brokerage added that the bank's mobilization of low-cost FCNR deposits was relatively subdued, partly due to the absence of an offshore presence.
Analyst Ratings and Revised Target Prices
Several brokerages reacted to the earnings report with updated ratings and target prices:
- Nuvama Institutional Equities: Citing relatively expensive valuations at 2.5 times the current market price-based adjusted book value, Nuvama retained its 'Reduce' rating on AU Small Finance Bank. The brokerage cut its 12-month target price to Rs 925 from Rs 950, valuing the lender at 2.4 times its estimated September 2028 adjusted book value (ABV). They also warned that the ongoing rate hike cycle and rising rural stress could pose risks to both margins and asset quality.
- JM Financial: While retaining a 'Buy' rating, JM Financial lowered its target price on the bank to Rs 1,110 from Rs 1,165. The brokerage acknowledged the bank's continued delivery of industry-leading growth and credit costs comfortably within guidance. However, they flagged the NIM trajectory in a rising-rate environment and the lender's reliance on insurance income as key variables to monitor. The revised target price values the bank at 3 times its estimated FY28 price-to-book (P/B) value, down from 3.1 times previously.
- Motilal Oswal Financial Services Ltd (MOFSL): MOFSL maintained its 'Buy' rating on AU Small Finance Bank, setting a target price of Rs 1,275, based on 3.4 times its estimated FY28 book value. The brokerage largely retained its earnings estimates and projected a compound annual growth rate (CAGR) of 34 percent in profit after tax (PAT) over FY26-FY28.
The varied reactions from brokerages underscore the mixed sentiment surrounding AU Small Finance Bank's performance, balancing strong AUM growth against concerns over NIM contraction and asset quality.