AU Small Finance Bank (AU SFB) saw its shares rise 12 percent in the past month as the stock cut its year-to-date losses to 10.46 percent. The stock is in the news after the SFB submitted an application to the Reserve Bank of India (RBI) for a voluntary transition to a universal bank from a small finance bank.
Nirmal Bang Institutional Equities has revised its earnings estimates upwards for AU SFB by 5.5 percent for FY25 and 6.5 percent for FY26 on the assumption of 24.5 percent CAGR in loan book over FY24-FY26. It values AU SFB at 3 times the estimated September 2026 adjusted book value against a five-year average P/ABV multiple of 2.94 times. The broker suggested a target price of Rs 811 for AU SFB against Rs 745 earlier.
“Considering that the merger integration with Fincare SFB is well underway and the prospects of AU SFB becoming a universal bank, we have a positive view of AU SFB. Maintain ‘BUY’,” it said.
If AU SFB gets a universal bank license, the perception of the bank among customers may improve and result in enhanced business opportunities, said Nirmal Bang Institutional Equities. In international business, becoming a universal bank will improve the ease of doing business for AU SFB, as globally there is no concept of SFB, the domestic brokerage said, noting the concept is unique to India, as a result of which international business is not smooth for SFBs.
“SFBs are not allowed to collect taxes on behalf of the government, which AU will be able to do on conversion to a universal bank. In infrastructure projects, SFBs can’t participate in toll and annuity collections, in which universal banks are present. The bank will also be able to get government agency businesses, which is a big pool of money.
Universal banks, through relationships with large corporations, get CA balances and corporate salary accounts, which is another major source of funding that will open up for AU,” it said.
Upon becoming a universal bank, over a period of time, the cost of funds has the potential to decline by 25 bps, Nirmal Bang said, adding that the PSL norms will also get relaxed from 75 percent of NDTL to 40 percent of NDTL.
Nirmal Bang noted that 50 percent of SFB loans need to be less than Rs 25 lakh, which is not the case for a universal bank. Besides, there would be the release of capital as the CAR requirement will go down from 15 percent for the SFB to 11.5 percent.
The brokerage met the management of AU SAB represented and noted that the merger with e-Fincare is well on track.
“e-Fincare is operating as the 6th business unit of AU SFB. The asset quality of microfinance business is relatively better as compared to peers, and the bank has kept guardrails in the form of geographic and loan amount wise caps and compulsory e-KYC and bureau checks,” it said.
AU SFB has given an FY25 loan and deposit growth guidance of 25 percent, NIM guidance of 5.7-5.8 percent, cost-to-income ratio guidance of 62-63 percent, credit cost guidance of 1.1-1.2 percent, and RoA guidance of 1.6 percent.