Focus remains on creating a sustainable retail franchise. AU Small Finance Bank (AUBANK) has sold 3.5million shares (4.46%) in Aavas Financiers (AAVAS). With this sale, the bank has now divested pretty much its complete stake in accordance with the stated guidance of monetising. We worth the stock at `1,one hundred (4.4x Sep’22E BV) and sustain ‘buy’.
AUBANK has informed the exchanges that it has sold 3.5million shares in AAVAS, representing 4.46% of its paid-up capital. With this stake sale, the bank has divested pretty much its complete stake with a mere 3,383 shares becoming held by it at present. The stake sale, at `1,527/share, represents a sale worth of `5.3billion. Consequently, the book worth increases by 12%/10% for FY21E/FY22E. The Tier-I ratio for the bank strengthens by ~210bp to 20.4% v/s 18.3% as at 2QFY20-finish.
AUBANK earlier highlighted that general company activity had touched ~95% of pre-Covid levels, barring specific sectors — education, tourism, travel, and retail. This is led by a wholesome uptick in the semi-urban and rural regions. Incremental disbursements in the Passenger Vehicle portfolio (Ola/Uber) have also picked up steadily. The management remains committed to creating AUBANK into 1 of the greatest retail franchises. The bank plans to launch its credit card company in 4QFY21 and highlighted that its concentrate would stay on wheels, secured company loans (SBL) and housing finance segments, which are probably to comprise ~75% of lending more than the subsequent two-3 years.
The management has stepped up its efforts on creating a powerful liability franchise, with an enhanced concentrate on developing its retail term deposits and CASA, which presently constitutes ~54% of total deposits (v/s 38% in FY19). The concentrate remains on developing in its core markets even though following a selective strategy in urban markets. The bank believes in ‘quality’ more than ‘quantity’ which it has accomplished by possessing a granular liability franchise. The credit-to-deposit ratio has enhanced to ~one hundred% presently from 168% in FY18, and the bank aims to additional boost this to 90% by Mar’23. It highlighted that price of funds is probably to see a additional reduction in 3QFY21, but is probably to stabilise sub-7% post 4QFY21.
Collection efficiency for the bank has been holding nicely, while the moratorium pool, which is however to make any payments, is hovering ~3%. The management believes this pool is vulnerable and expects the upper variety of slippages to be ~3%. To date, only 1 account has been restructured, even though requests have been received for only specific accounts. Although the actual effect on asset high quality is tricky to predict, it expects the general effect to be restricted. Therefore, the restructuring book is probably to stay variety-bound. We anticipate 2.2%/.6% GNPA/NNPA by FY22E. The bank believes its present provision buffer (~1% of total loans) is adequate and would appear to frontload provisions on an account-certain basis (exactly where pressure is visible). AUBANK reported a wholesome overall performance more than 2QFY21. Progress on collection efficiency has been specifically powerful. A sharp decline in the moratorium book and enhancing collection trends eased issues about asset high quality. Current moratorium trends recommend ~3% of the portfolio remains vulnerable. On the company front, the retail deposit mix has enhanced sharply, even though AUM development is displaying wholesome recovery trends. We anticipate 2HFY21 to be superior as the ongoing festive season must assist revive demand in the economy. The present stake sale strengthens its capitalisation ratios, enabling the bank to undertake lending possibilities, even though navigating the crisis effectively. We estimate AUBANK to provide RoA/RoE of 2.1%/17.5% in FY22E and anticipate credit price of 1.7%/1.4% for FY21E/FY22E.