Why AU Small Finance Bank Share Price is Falling

The Nifty Bank Index, a gauge of India's top 12 banking stocks, had a good year in 2023, gaining over 11%.

However, this performance has encountered a setback recently, registering a 2.5% decline so far in 2024.

The decline was mainly due to Foreign Portfolio Investors (FPIs) being net sellers in the Indian market, dumping banking stocks due to surging US bond yields.

In the midst of the broader downturn in banking stocks, Au Small Finance Bank emerged as the most adversely impacted, witnessing a substantial 12% decline in a single day and reaching a nine-month low.

Here's what led the stock's downfall.

#1 Disappointing Q3 Results

Shares of AU Small Finance Bank (AU SFB) tanked 12% to Rs 625, hitting a nine-month low, on Monday, after it reported weak Q3 numbers.

While its net interest income (NII) exhibited a 14.9% increase, reaching Rs 13.2 bn compared to the previous year's Rs 11.5 bn, the real setback came from the net profit.

The lender reported a 4% year-on-year (YoY) decline in net profit at Rs 3.8 bn in the December quarter (Q3FY24) due to a sharp rise in provisions and contingencies.

The lender had posted a net profit of Rs 3.9 bn in Q3FY23.

The stock traded at its lowest level since April 2023, reflecting the market's disappointment. The bank's net interest margin (NIM) stood at 5.5, falling at the lower end of the guided range of 5.5-5.7%.

The bank reported an improvement in gross non-performing assets (NPA), which stood at 1.9%, down from 1.8% from last year. Net NPA jumped to 0.7% from 0.5% YoY.

Its advances grew by 20% YoY to Rs 676.2 bn in the reporting quarter compared to Rs 563.4 bn last year. The lender's credit-to-deposit ratio stood at 83%.

The bank's CASA deposits increased by 13% YoY to Rs 264.5 bn compared to Rs 234.7 bn in Q3FY23. The CASA ratio stands at 33%.

It also reported a 20% YoY increase in gross advances at Rs 676.2 bn. The bank's securitised or assigned loan portfolio stood at Rs 27.4 during the quarter.

The lender added that it has 833,000 live credit cards, with about 150,000 of them acquired during the quarter.

The lender said its net worth has surpassed Rs 120 bn, an over fivefold

#2 PCR Reduction

Separately, the AU Small Finance Bank announced its decision to counterintuitively reduce its specific provision coverage ratio (PCR) to 66% in the face of increasing stress adds another layer of concern.

The potential merger with Fincare appears, at first glance, to be positive for earnings per share (EPS), book value per share (BVPS), and return on assets (ROA).

However, the challenges in managing human resources (HR), technology integration, and microfinance institution (MFI) portfolio management could pose significant hurdles.

Moreover, the anticipated increase in provisions due to heightened asset-quality stress in the bank's card portfolio and VF portfolio adds to the apprehension.

This further dragged the stock down.

What Next?

Looking forward, the bank envisions achieving break-even in its credit card book by FY25.

Further, the bank has expressed its excitement for the growth phase outlined in India's 'Viksit Bharat@2047' initiative, which aligns with the bank's commitment to building 'AU forever.'

As a youthful financial institution, ongoing investments are dedicated to franchise expansion, brand development, and the enhancement of technological capabilities.

Additionally, with approvals secured from CCI for the proposed merger, the bank eagerly awaits RBI's approval, anticipating the diversification it can bring to AU's future endeavours.

How AU Small Finance Bank Shares have Performed Recently

AU Small Finance Bank have fallen 20% in the last one month.

In past three months the stock is down 6%, while it gave returns of over 14% in the past six months.

AU Small Finance Bank touched its 52-week high of Rs 813.4 on 9 January 2024 and a 52-week low of Rs 548 on 24 March 2023.

At the current price, AU Small Finance Bank trades at a PE multiple of 26.4 and a price-to-book value multiple of 3.6x.

About AU Small Finance Bank

AU Small Finance Bank is an Indian scheduled commercial bank that was founded as vehicle finance company AU Financiers (India) in 1996 and converted to a small finance bank on 19 April 2017.

The bank has a long-standing track record of over two decades of being a retail-focused and customer-centric institution; serving low and middle income individuals and small businesses that have limited or no access to formal banking and finance channels.

The bank offers a comprehensive suite of loan, deposit & payment products and services.

For more details about the banking sector, you can check out the banking sector report on our website.

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