AU Small Finance Bank stock top choice in FY20, overtakes PNB, BoB in m-cap

At 8x FY21 estimated book, even as it is the most expensive lender, the stock remains among the preferred picks in the banking pack

With gains of over 100 per cent in the past year, AU Small Finance Bank (AU SFB) is the undoubted top performer among stocks in banking and financial services.

In terms of price gains in a year, it has toppled giants such as ICICI Bank, Bajaj Finance, HDFC Bank, and State Bank of India, while in terms of market capitalisation, it has overtaken long-standing players such as Bank of Baroda, Punjab National Bank, and IDBI Bank.

Its market cap, of Rs 35,083 crore, is more than the combined figures of 10 other banks including Oriental, Bank, Syndicate Bank, and DCB Bank. Supporting this bull run is its relatively tiny balance sheet of just Rs 53,732 crore (loans of Rs 29,867 crore and deposits of Rs 23,865 crore).

What has also supported the price rally is the bank’s ability to grow at upwards of 35 per cent, quarter after quarter and whether there is an economic slump or not. For instance, in the December quarter (Q3), which arguably turned out to be the toughest so far for banks, AU SFB managed to expand its loan book to Rs 29,867 crore (up 37 per cent year-on-year). Consequently, its net interest income grew by 46 per cent year-on-year, and net profit pocketed a handsome 99 per cent increase. All of this was done without comprising much on asset quality (maintained at 1.9 per cent) and improving profitability by 17 basis points (bps) year-on-year to 5.5 per cent in Q3. Drawing 41 per cent of its business from Rajasthan, which is also its headquarters, AU SFB’s ability to focus on select products and target customers helps it remain nimble on feet. For instance, among AU SFB’s product offering vehicle loans and small business loans account for 77 per cent of its loan book. While in Q3, AU SFB’s disbursements growth at 21 per cent year-on-year visibly came off its past levels, these numbers albeit its relatively low base turned out to be the best in the sector. 

What’s also positive is its ability to expand its deposit base (up 63 per cent year-on-year in Q3). However, the share of low-cost current account — savings account (CASA) deposits wobbled a bit to 17 per cent from 24 per cent last year. Clearly, there is more work to be done for the bank to showcase itself as a serious competitor to its larger peers who operate at CASA ratio upwards of 30 per cent. 

But even beyond these numbers, AU SFB attracted reasonable investor interest right from its initial public offering in 2017 for its clean shareholding structure and non-microfinance oriented business. With a clutch of SFBs waiting to hit the market and most of them saddled with the burden of high promoter holding which will remain an issue even after their listing, it puts AU SFB in an advantageous position in terms of being insulated from capital dilution.  

However, while these positives have helped the bank so far, investors much be cognizant that AU SFB’s assets are still at a nascent stage and haven’t really stood the test of time yet. “There is a concentration of business, geography while liabilities are still in its early stages as the bank is still quite new,” say analysts at Kotak Institutional Equities. The brokerage is among the few to have a ‘sell’ rating on the stock. “We find valuations expensive at current levels given the higher cost of equity to reflect the risk of the businesses,” they add. Whether AU SFB stock will sustain its run or not, only time will tell. For now, 13 of the 22 analysts polled by Bloomberg have a ‘buy’ on the stock. But, there average target price of Rs 1,026 indicates a potential downside of 11 per cent.

Even at 8x FY21 estimated book value, the stock remains among the preferred picks in the banking pack.