AUSFB: With multiple headwinds ahead, valuations appear expensive

Provisioning cost increased by over 3x to Rs 151 crore in Q4 as customers opt for moratorium

AU Small Finance Bank’s (SFB) March quarter (Q4) performance was its weakest since its listing in June 2017. With economic activity coming to a grinding halt towards the end of March, growth declined and asset quality took a severe hit.

Net profit grew 3.5 per cent year-on-year (YoY) to Rs 122.3 crore, with loan growth at 18.3 per cent. As a consequence, the AU SFB stock was locked in the lower circuit (with no buyers) for two straight sessions.

It has already shed 53 per cent in three months. However, analysts feel the downside risks are still on the rise. There are three key metrics that need to be monitored, at this stage.

First, nearly 47 per cent of the lender’s loan book comprises vehicle loans, but auto sales have been weak for almost a year. Any significant recovery, too, seems quite distant. Further, loans to small and medium enterprises or SMEs form 37 per cent of its book, which has faced heavy pressure of late.

 

 

ICICI Securities said that with high exposure to two vulnerable segments, growth may take a substantial hit in FY21. Loan disbursements dipped 2.3 per cent YoY in Q4, which is a good indicator of the challenges ahead. The brokerage expects AU SFB to grow its loan book at just 8 per cent in FY21, vis-à-vis the 30-40 per cent growth seen previously.

Second, investors should keep a watch on asset quality. While one could say that the gross non-performing asset (NPA) ratio at 1.7 per cent in Q4 (2 per cent last year) is commendable, provisioning cost at Rs 150 crore — zooming from Rs 40 crore in the December quarter — is cause for concern.

According to Emkay Global, Rs 2,700 crore of the book formed part of the special mention account (SMA), which forced it to take an elevated provisioning of Rs 138 crore, based on the April 17 regulatory directive.  

The bank needs to provide another 5 per cent towards SMA accounts in the June quarter. Nearly 25 per cent of its standard borrowers have opted for the moratorium on repayment. How their approach to repayment changes once the moratorium ends, however, needs to be seen.

Third, the low-cost current account–savings account or CASA ratio dipped further to 14.5 per cent in Q4, a 10-quarter low. Much of the deposit growth (34.7 per cent YoY) came from retail money. Though this hasn’t impacted costs, it is not yet clear whether the blended cost of funds can be sustained at 7.5 per cent.

With multiple roadblocks ahead, valuations appear expensive at 3.3x its FY21 estimated book.