40% FII Stake: This Banking Stock Is Axis Securities’ Pick Of The Week For Rs 702 TP

Vehicle finance, SME, home loans, business banking, and additional products are among the many services provided by the retail-focused AU Small Finance Bank (AUSFB). The bank had 1,049 touchpoints in India as of December 23. The brokerage firm Axis Securities is bullish on the stock and maintained it as the pick of the week for a target price of Rs 702 following the completion of the merger with Fincare SFB.

Investment Rationale For AUSFB By Axis Securities

Strong business growth to continue; merger offers diversification benefits: AUSFB aims to maintain its growth momentum by targeting a 23-25% CAGR in deposits by FY27E, focusing primarily on individual and retail deposits. This growth strategy extends to its asset side, aligning the loan book expansion with deposit growth. Following the completion of the merger with Fincare SFB, AUSFB will have the capability to offer a comprehensive range of products catering to diverse customer segments. The merger will significantly enhance the bank's distribution network, provide opportunities for geographical expansion, and broaden its customer base, thereby facilitating healthy growth prospects. We anticipate AUSFB to achieve a 32/34% CAGR growth (inclusive of merger impact) in terms of deposits/advances over FY24-26E.

Margins likely to improve gradually: The shift in portfolio mix towards higher credit quality but lower-yield products, coupled with ~75% of the loan book being fixed, resulted in spread compression for AUSFB. Moreover, unexpected liquidity tightening, prolonged higher interest rates, and heightened competition exacerbated margin pressure during 9MFY24. However, there are signs of improvement as incremental CoF experienced a slight moderation in Q4FY24 (down by 4bps QoQ), while incremental disbursement yields have seen improvement (up by 8bps QoQ). Additionally, the merger with Fincare presents AUSFB with the opportunity to venture into the microfinance segment (a 'Higher RoA-Higher Risk' segment). Furthermore, AUSFB's strategic shift towards enhancing the share of higher-yielding businesses should provide further support to the bank's margins.

Asset quality to remain stable: Except for the credit card portfolio, credit costs and asset quality trends have largely normalized. The management has noted that in the near term, until the credit card book is built and seasons, credit costs will stay between 6-7% and will eventually stabilize near industry averages. Similarly, on the secured book, credit costs are projected to remain steady at 0.5-0.6%. Following the merger with Fincare SFB, microfinance credit costs are expected to be limited to around 3%. We anticipate that AUSFB's asset quality will remain mostly stable over the medium term, barring any external shocks.

AUSFB Share Price Target

"We recommend a BUY rating on the stock with a TP of Rs 702/share, implying an upside of 10% from the CMP," said Axis Securities in a note.

AU Small Finance Bank Shareholding Pattern

FII/FPI dropped their holdings from 41.13% in Q3FY24 to 39.37% in Q4FY24, mutual funds bumped holdings from 11.71% to 14.53%, and institutional investors increased holdings from 61.94% to 62.14% during the same period, according to the AUSFB shareholding pattern that is available on Trendlyne. Promoter holdings decreased from 25.46% in the December 2023 quarter to 25.45% in the March 2024 quarter.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.