Asset quality, second Covid-19 wave concerns weigh on AU SFB stock

Gross NPA ratio spiked to 4.25 per cent in March quarter from 1.68 per cent a year ago

Shares of AU Small Finance Bank (AU SFB) plummeted 10.7 per cent to close at Rs 1,003.45 on Friday as the lender's asset quality worsened in the March quarter (Q4) of FY21. The rising second Covid wave impacting businesses is only adding to the Street’s concerns as AU SFB’s provisioning coverage ratio (PCR) is also lower than peers. In comparison,  Sensex was down 2 per cent and BSE Bankex by 2.6 per cent on Friday.

According to the bank’s results announced on Thursday evening, the gross non-performing assets (NPAs) spiked to 4.25 per cent of gross advances as of March 31, 2021, from 1.68 per cent in the same period last year and 0.99 per cent in December 2020 quarter (Q3).

Net NPA ratio also soared to 2.18 per cent from 0.81 per cent a year ago, and 0.24 per cent in Q3. Provisions for bad loans and contingencies, meanwhile, was up to Rs 177.8 crore from Rs 150.6 crore in Q4’FY20 but far lower than Rs 283.6 crore in Q3.

"Asset quality performance was slightly disappointing with higher reported gross NPA ratio at 4.3 per cent (3.3 per cent in Q3FY21), including less than 90 days past due (DPD) pool of 1.5 per cent who are paying but are being still classified as NPA as they were once NPA (ONAN) due to earlier Supreme Court stay on NPA tagging," noted Emkay Global analysts led by Anand Dama.

Adjusted for the pool, while reported gross NPA ratio would stand lower at 2.7 per cent, it’s still higher year-on-year (YoY) and sequentially.

The brokerage, however, said, 62 per cent of ONAN portfolio (1.5 per cent of loans) is in 60-90 DPD bucket and the second wave of Covid-19 could lead to higher NPA formation in this pool.

The Street is also worried about restructuring pool under the RBI’s Restructuring Framework, which came in higher at 1.8 per cent of loans compared with the earlier guidance of 1.5 per cent. Moreover, at the end of March 2021, AU SFB’s PCR stood at 50 per cent (60 per cent against >90 DPD gross NPAs). Though not strictly comparable, it is lower than some larger peers like ICICI Bank (78 per cent) and Axis Bank (72 per cent).

“AU SFB is the only bank that has, so far, reported a sharp sequential increase in NPAs. HDFC Bank, ICICI Bank, Axis Bank, M&M Financial and Bajaj Finance saw a sequential decline in NPAs in Q4 while Shriram Transport Finance reported a marginal increase. Given this, AU's NPA increase is discomforting,” observe analysts at Elara Capital.

They further note that AU's PCR is amongst the lowest though the profile of its borrowers is weaker than large banks. "The bank also has a very low Covid buffer of 19 bps vs 60-150 bps for other large banks. Taking all these factors into account, we have Sell rating on the stock," they said. Their target price (TP) is Rs 715.

Overall, AU SFB reported 38 per cent YoY rise in net profit at Rs 169 crore in Q4. Total income rose 15 per cent YoY to Rs 1,569, while net interest income moved up 18 per cent to Rs 656 crore.

The bank reported a strong credit growth of 21 per cent YoY and 13 per cent sequentially mainly driven by robust traction in wheels and small business loans (BSL) portfolio. Deposit growth, too, was strong at 38 per cent YoY and 21 per cent sequentially with the share of deposits/AUM now at the highest level of 96 per cent, driven by strong traction in retail deposits.

Post results, while Morgan Stanley and Motilal Oswal Securities have a buy rating on the stock with target price (TP) of Rs 1,150 and Rs 1,350 respectively, Emkay is neutral with a TP of Rs 1,000. Bloomberg consensus TP is Rs 1,123.

"We believe that the bank has performed well on business growth, but asset quality remains a key risk, given its otherwise high risk portfolio," Emkay Global said. We believe the higher provisioning buffer running into the second Covid-19 wave would have been preferred instead of higher profits in FY21, they add.

Given the fresh build-up of stress in the SME and retail segments for the financial sector, Siddharth Purohit, equity analyst at SMC Global Securities, has turned cautious on small banks.