7 reasons why Motilal Oswal says 'Buy' again on AU SFB; stock price up 4%

Domestic brokerage firm Motilal Oswal has reaffirmed its ‘Buy’ rating on AU Small Finance Bank stock, on the back of a favourable risk-reward profile and strong growth prospects. The brokerage has also kept target price unchanged at ₹875 per share.

 

“We estimate AU SFB to deliver a 24 per cent loan compound annual growth rate (CAGR) over FY26-28, which, coupled with improvement in operating metrics, will enable a 33 per cent earnings CAGR. The recent correction in stock price has made the risk-reward favourable. Hence, we reiterate our ‘Buy’ rating on the stock with an unchanged TP of ₹875 (based on 2.8x FY27E BV),” said Nitin Aggarwal, Dixit Sankharva and Disha Singhal of Motilal Oswal in a noted dated September 22.

 

 

On the bourses, AU SFB share price was buzzing in trade in a subdued market on Tuesday, September 23, 2025, with the scrip rising as much as 3.83 per cent to hit an intraday high of ₹733.25 per share. At 12:40 PM, AU SFB share price was trading 3.35 per cent higher at ₹729.80 per share. In comparison, BSE Sensex was trading 0.07 per cent higher at 82,214.05 levels.

 

Here are the seven reasons why Motilal Oswal is bullish on AU SFB: 

Steady loan growth outlook

 

AU SFB reported 23 per cent year-on-year (Y-o-Y)  gross loan growth in Q1FY26, maintaining healthy momentum despite challenges in unsecured lending segments such as microfinance (MFI) and cards. While loan growth may remain moderate in Q2 due to macroeconomic softness and delayed vehicle purchases following GST reductions, recovery is expected from Q3FY26 onwards, analysts said. Secured segments including Wheels, Mortgages, Small Business Loans, and Gold continue to offer strong visibility, while the used vehicle finance portfolio remains resilient. Overall, loan growth is projected at 21 per cent Y-o-Y for FY26E and ~24 per cent CAGR through FY28E.

 

Healthy deposit mobilisation

 

The bank’s deposit growth remains robust, with Q1FY26 witnessing a 31 per cent Y-o-Y rise, outpacing the system. AU SFB’s Current Account Savings Account  (CASA) ratio stands at ~29 per cent, bolstered by a 34 per cent increase in current accounts and 13 per cent growth in savings balances. Stable deposits – including CASA, retail term deposits, and non-callable bulk deposits – constitute ~79 per cent of total deposits, highlighting the stickiness and granularity of its liability base. A controlled credit-deposit (CD) ratio of ~86 per cent and healthy liquidity buffers (LCR at 123 per cent) further strengthen its balance sheet.

 

Margins expected to recover

 

Following the merger with Fincare SFB, AU SFB’s net interest margin (NIM) moderated sharply to 5.4 per cent in Q1FY26 due to repricing of loans and a declining share of high-yielding MFI and card portfolios. Motilal Oswal analysts expect margins to bottom out in Q2 and gradually recover from Q3FY26, driven by lower funding costs, stabilisation in asset yields, and an increasing share of fixed-rate loans.

 

Cost efficiency under control

 

AU SFB has improved its cost-to-income ratio (C/I) from 65 per cent in FY24 to 56.5 per cent in FY25, with further improvement to 54 per cent in Q1FY26. This, analysts suggest, reflects a combination of treasury gains, operational rationalisation, and moderated business growth. The bank expects near-term cost ratios to remain below 60 per cent, even as it expands its network and diversifies products, with a gradual improvement projected over the medium term.

 

Universal Bank transition strengthens growth prospects

 

According to analysts, the RBI’s in-principle approval for AU SFB’s transition to a universal bank is a structural positive. The move is expected to unlock operational efficiencies, broaden access to stable deposits, and facilitate portfolio diversification. It removes restrictions on loan ticket sizes and borrower exposure, enabling the bank to scale retail, SME, and mid-corporate segments more effectively.

 

Asset quality pain nearing bottom

 

While gross non performing assets (GNPA) rose to 2.47 per cent in Q1FY26, reflecting stress in MFI and card segments, management expects stress to peak in Q2. Credit costs, which were 34bps in Q1, are projected to ease to ~30bp in Q2, signalling a sharp deceleration in provisioning during the second half. With forward-looking credit guardrails and prudent underwriting, analysts believe, asset quality is expected to normalise over time, supporting sustainable credit costs in the medium term.

 

Valuation and outlook

 

Motilal Oswal analysts view the recent correction in AU SFB’s stock price as an attractive entry point. With strong loan growth, improving asset quality, stable deposits, and operational efficiencies, the bank is positioned to deliver sustainable returns. The brokerage has retained its target price of 875, based on 2.8x FY27E book value, reiterating a ‘Buy’ rating.

 

With steady operating improvements, a favourable risk-reward profile, and long-term expansion opportunities, analysts at Motilal Oswal believe, the bank remains a preferred pick for investors seeking exposure to the small finance banking segment.