Asset quality, second Covid wave concerns weigh on AU Small Fin Bank stock

Shares of AU Small Finance Bank plummeted 11.5 per cent in the intra-day trade to hit a low of Rs 994 on the BSE on Friday, but ended 10.7 per cent lower at Rs 1,003 apiece, as the lender's asset quality worsened in the March quarter of FY21 (Q4FY21). 

According to the financial statement of the bank, the gross non-performing assets (NPAs) spiked to 4.25 per cent of gross advances as of March 31, 2021, from 1.68 per cent in the same period last year. Net NPAs or bad loans also soared to 2.18 per cent from 0.81 per cent. Provisions for bad loans and contingencies, meanwhile, was raised to Rs 177.78 crore from Rs 150.57 crore earlier. 

"Asset quality performance was slightly disappointing with higher reported GNPA ratio at 4.3 per cent (3.3 per cent in Q3FY21), including less than 90 days past due (DPD) pool of 1.5 per cent who are paying but are being still classified as NPA as they were once NPA (ONAN) due to earlier SC stay on NPA tagging. Adjusted for the pool, reported GNPA ratio would stand moderate at 2.7 per cent," noted analysts at Emkay Global.

That said, 62 per cent of ONAN portfolio (1.5 per cent of loans) is in 60-90 DPD bucket and the second wave of Covid-19 could lead to higher NPA formation in this pool, the brokerage added.

Apart from the asset quality issue, investors were also worried about restructuring pool under the RBI RE framework which came in higher at 1.8 per cent of loans compared with the earlier guidance of 1.5 per cent.

Overall, AU Small Finance Bank reported an over 38 per cent rise in net profit at Rs 168.98 crore for the last quarter of fiscal ended March 2021. The lender had posted a net profit of Rs 122.32 crore in the same quarter of 2019-20.

Total income rose to Rs 1,569 crore as against Rs 1,366.60 crore while interest income moved up to Rs 1,292.37 crore during the reported quarter from Rs 1,183.45 crore in the year-ago period. For the full year 2020-21, the net profit jumped by more than 73 per cent to Rs 1,170.68 crore as against Rs 674.78 crore.

As regards loan book and desposits, the bank has reported a strong credit growth of 21 per cent YoY and 13 per cent QoQ mainly driven by robust traction in wheels and SBL portfolio. Deposit growth too was strong at 38 per cent YoY and 21 per cent QoQ with the share of deposits/AUM now at the highest level of 96 per cent, mainly driven by strong traction in retail deposits. CASA ratio has improved to 23 per cent from 22 per cent in Q3 and 14 per cent in Q4FY20.

"We believe that the bank has performed well on business growth, but asset quality remains a key risk, given its otherwise high risk portfolio. The bank has clocked strong 2.5 per cent RoA in FY21 on the back of one-off gains from the stake sale in Aavas Finance, but we believe the higher provisioning buffer running into the second wave of Covid-19 would have been preferred instead of higher profits in FY21," Emkay Global said.

Currently, the brokerage has a Hold rating on the stock (trading at 4.6x FY23E ABV, based on current estimates), given the stock's rich valuations.