Shares of AU Small Finance Bank fell as much as 8.4% on Monday to Rs 544 on the BSE after the lender reported a soft third quarter. Multiple brokerages, including Nuvama and Nomura, downgraded the stock to “reduce” and slashed target prices, citing asset quality concerns and rising credit costs.
The Jaipur-based lender reported a 41% jump in net profit to Rs 528 crore for the December 2024 quarter, compared to Rs 375 crore in the same period last year. Total income surged 48% year-on-year to Rs 4,732 crore, driven by a 50% jump in interest income to Rs 4,113 crore. However, brokerages flagged higher slippages, deteriorating asset quality, and elevated credit costs, raising concerns about the bank’s near-term profitability.
Nuvama lowered its target price to Rs 530 from Rs 590, citing a sharp deterioration in asset quality. The brokerage noted that slippages increased 30% quarter-on-quarter, with non-performing loans in microfinance and credit card portfolios rising sharply. Credit costs grew 35% sequentially to 1.8% of gross loans, leading to a downgrade in the stock rating to “reduce.”
Nomura also echoed similar concerns, cutting its target price to Rs 500 from Rs 580. It highlighted elevated GNPA (Gross Non-Performing Assets) levels in the microfinance segment and credit cards, coupled with a decline in net interest margins (NIM) to 5.9%. Nomura also lowered its FY26-FY27 EPS estimates by 5% and revised its return expectations, citing limited visibility on asset quality improvement.
At the stock’s current price of Rs 544, Nuvama’s target price of Rs 530 implies a downside potential of about 2.6%, while Nomura’s target price of Rs 500 indicates a potential downside of 8%.
The company’s management revised its loan growth guidance for FY25 to 20%, down from the previous 25%, and increased its credit cost guidance to 1.5-1.6% from 1.25-1.35%. While AU Small Finance Bank has implemented corrective measures to address asset quality stress, analysts remain cautious about the bank’s near-term outlook, with expectations of subdued returns and limited re-rating potential.
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