AU Small Finance Bank Limited: Growth in Assets and Favourable Sectoral Trends Should Act As Growth Enablers

Summary

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• Diversified product mix, ability of mobilisation of deposits, and well-capitalised balance sheet helped AU Small Finance Bank Limited report steady growth, even though there was a sluggish economic environment.
• In less than 3 years, AU Small Finance Bank has built a deposit base of INR26,164 crore and this stands out among small finance banks in terms of granularity and branch productivity.
• Despite weak near-term outlook, outbreak of COVID-19 presents an opportunity for the country to position itself as a credible manufacturing alternative.
• Long-term economic fundamentals should seek support from continuing policy reforms and improved banking and corporate balance sheet positions.

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History of AU Small Finance Bank Limited:

Founded in 1996 as Au Financiers, a non-deposit taking NBFC, it effectively focused on funding economic growth, and was targeting under-served and un-served low & middle-class individuals. For over 2 decades, it offered secured funding to customers especially in Vehicle Loan, Business Loan and Housing Loan segments while spreading presence geographically. In 2015, when central bank came out with small finance bank licensing guidelines, AU was strongest of 10 selected entities out of 74 applicants to get coveted license because of strong foothold and track record. In April 2017, Au Financiers was transformed into AU Small Finance Bank.

Growth Enablers of AU Small Finance Bank Limited

• Strong Growth in Assets in 2Q21: On-ground situation saw significant improvement in 2Q21 and there was positive momentum across all measures, including digital banking journey, activity levels, collection efficiencies, retail deposits, and disbursements. Range of pro-active initiatives taken by Government and RBI helped mitigate impact of pandemic on several borrowers. Bank clocked AUM at INR30,590 crores, exhibiting 10% year-over-year growth, and ~2% quarter-on-quarter. Its retail AUM was dominant at ~84%. There was singular focus on granular deposits – CASA ratio saw an increase to 21% vs 16% in 1Q21 and 16% in 2Q20.
• Improved Operating Environment Provides Visibility of Earnings Growth: In 2Q’s release, AU Small Finance Bank’s update on operating environment exhibited optimism. Improvement was seen in customer confidence, business continuity, and activity levels. However, some sectors like education, travel & tourism and hospitality have been recovering but at a slower pace because of obvious reasons. Pace of revival should pick-up in next few months given uptick in economic and business activities and relaxations on restrictions.
• Rise in Share of Retail AUM: Assets under management saw an increase of 27% year-over-year from INR24,246 crore in FY19 to INR30,893 crore in FY20. This growth was principally led by growth in retail asset under management, expanding ~38% over same period. Share of retail AUM in that of total AUM increased from 78% as on March 31, 2019 to 84% on March 31, 2020.
• Consistent Growth Seen in FY20: In FY 2019-20, AU Small Finance Bank saw its deposits growing by 35% year-over-year and retail term deposits including CASA made up 43% of total deposits, exhibiting an increase from 39% a year before. Cost of funds fell 18 basis points on year-over-year basis to 7.7%. Liquidity position was strong, with LCR at 133% v/s minimum requirement of 90% (as on March 31, 2020).
• Favourable Sectoral Trends Should Lend Some Support: Small finance banks had been introduced by central bank of the country with intent of giving financial benefits for unbanked and under-banked sections of economy. Small finance banks have made their presence felt, improving market share in both loans and deposits. There is scope for growth in various underserved segments. Further, as branches mature and visibility for small finance banks improves, benefits from improving operating leverage should help grow core profitability.
• Increased Digital Adoption: With onset of COVID-19, there has been increase in digital transactions as every sector has been trying to carry on business digitally. In banking sector, there has been increased adoption of digital tools and this trend should continue for foreseeable future. In context of corporate internet banking, bank saw increase in user base with rapid increase in transactions and there has been strong growth in organic traffic through various engagement activities on its website. In upcoming quarters, AU Small Finance Bank should see increase in internet and mobile banking users as more and more people start using digital tools. Bank should also see continued increase in debit card user base and transaction volume should also follow.
• Retail Assets Remain AU Small Finance Bank’s Forte: In FY20, bank continues to strengthen its product range and value proposition in retail loans due to its domain experience. Share of retail loans at ~84% of total loans is one of highest from category of private sector banks. Bank expects that growth in this segment should be healthy, given new product offerings and geographic expansion. Bank has built a base of 1.7 million customers and it is gradually expanding it. Focus is on increasing per customer wallet share through higher cross-selling. Bank’s products per customer stands at 1.3x v/s average 4x for large and well-established private banks, providing opportunity for growth for cross-selling.
• MSME Lending in India: MSMEs are termed as engine of equitable economic development, giving significant opportunities for employment in less developed regions. In India too, MSMEs are considered as backbone of economy. As per annual report of Ministry of MSME of FY18-19, India provides home to ~6.34 crore MSMEs, cumulatively making up for 30% of nominal GDP. Growth outlook for this segment is encouraging because size of opportunity and reforms such as GST implementation, extension of credit guarantee fund scheme to NBFCs and lesser tax rates should incentivise lenders and improve transparency. Other initiatives aim to increase sector’s contribution to GDP to over 50% as the country targets to be a INR5 trillion economy.

Absurdly Cheap Valuations Favour Going Long

AU Small Finance Bank has compounded its net interest income at ~33% over FY16-20 and earnings per share at ~34%. It has a total market cap of INR28,22,052.92 lakhs and free float market cap of INR17,18,020.05 lakhs. Stock price of bank trades at ~40.35x of FY20 EPS which is at a deep discount to sectoral average of 48.54x, which favours going long on this stock.

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This Article represents the Author's own personal views. The Author did not receive any compensation and do not have any business relationship with any of the companies mentioned in the Article.