AU SFB shares rise on strong Q3 show, but brokerages split on valuation

AU Small Finance Bank share price rose 2.4 per cent in trade, registering an intra-day high at ₹1,025.45 per share on BSE. At 9:16 AM, AU Small Finance shares were trading 2.17 per cent higher at ₹1,022.5 per share. In comparison, the BSE Sensex was down 0.19 per cent at 82,021.82.

 

The stock was in demand after the small finance bank released its December quarter (Q3FY26) results on Tuesday, after market hours. According to analysts, the AU Small Finance Bank reported healthy numbers with margin expansion and lower credit costs. However, they remain cautious on valuation, cost discipline, and provisioning/expected credit loss (ECL) impact.

 

 

AU Small Finance Bank Q3 results highlights:

• In Q3, AU Small Finance Bank reported a 26 per cent year-on-year (Y-o-Y) rise in net profit to ₹668 crore, as compared to ₹528.4 crore a year ago and ₹560.87 crore in Q2FY26. 
• Its net interest income (NII) grew 16 per cent Y-o-Y to ₹2,341 crore, as compared to ₹2,023 crore a year ago. 
• The net interest margin (NIM), a measure of profitability of banks, stood at 5.7 per cent in Q3, up 25 basis points (bps) from 5.5 per cent in Q2FY26. 
• Provisions of the bank were down 34 per cent Y-o-Y and 31 per cent sequentially to ₹331 crore in Q3FY26.

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Brokerage’s view on AU Small Finance Bank

Elara said Q3FY26 was a better quarter with improving underlying trends. On the back of stronger-than-expected growth, the brokerage raised its target multiple to 2.7x from 2.3x and increased the target price to ₹955 from ₹786. However, given the recent sharp rally in the stock, analysts believe the risk–reward is now unfavourable, with limited room for manoeuvre as the bank navigates these challenges. The brokerage maintained its ‘Reduce’ rating on AU Small Finance Bank.

 

Elara noted that the key discussion points going forward will revolve around growth delivery, the durability of asset quality, and the bank’s transition towards a universal banking licence. It added that AU SFB has already seen a step-down from its earlier cycle return on asset (RoA) levels and faces near-term headwinds as it scales up, a transition that will take time.

 

Motilal Oswal also said AU Small Finance Bank delivered a robust Q3. It highlighted that growth remains among the strongest in the sector, with higher-yield segments expected to scale up further, supporting underlying profitability. 

 

The brokerage added that asset quality trends remain favourable, with easing stress and a revival in growth in the unsecured portfolio. Factoring in NIM expansion, normalising credit costs and improving business momentum, Motilal expects AU Small Finance Bank to deliver best-in-class earnings growth over the next few years. 

 

It slightly raised its earnings estimates and expects profit after tax (PAT) to grow at a 35 per cent compound annual growth rate (CAGR) over FY27–FY28E. Calling AU Small Finance Bank its top pick among mid-size private banks, Motilal Oswal reiterated a ‘Buy’ rating with a target price of ₹1,250. 

 

Emkay Global Financial Services said AU Small Finance Bank rebounded in Q3FY26 after a soft Q2. The brokerage noted that asset quality continues to improve, with the gross non-performing asset (GNPA) ratio easing to 2.3 per cent. However, it flagged a concern on provisioning, as the specific provision coverage ratio (PCR) declined to 62 per cent to support profitability, which it found disappointing, especially ahead of the ECL implementation.

 

Emkay largely retained its FY26–FY28E earnings estimates, with return on asset (RoA) assumptions improving to 1.5–1.7 per cent over the period. It said cost control will be critical to sustaining the recovery momentum. Given that valuations appear ahead of fundamentals, Emkay maintained a ‘Reduce’ rating with an unchanged target price of ₹875.

 

JM Financial Institutional Securities said the quarter reinforces the trend of risk normalisation and improving earnings visibility, though growth drivers outside secured lending are still in recovery mode.

 

At current valuations of 2.8x FY28 price-to-book value, JM believes much of the recovery and sustained growth is already priced in.

 

The brokerage has raised its target price on AU Small Finance Bank to ₹1,060 from ₹1,050, and maintains an ‘Add’ rating.

 

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