AU Small Finance Bank Share Price Target at Rs 725: ICICI Securities Research
AU Small Finance Bank’s Q4FY25 results offer a narrative of resilience amid volatility. Despite pressures from its unsecured lending portfolio, the bank has delivered stable growth in secured segments, managed to improve asset quality, and taken preemptive actions that may reduce credit costs moving forward. With a target price of Rs 725 and a current market price of Rs 614, ICICI Securities maintains a BUY recommendation. The bank’s consistent deposit growth, focused liability franchise expansion, and commitment to strengthening its secured loan book signal long-term sustainability.
Mixed Quarter: Strong Core Growth, Elevated Provisions
AU SFB posted an 8% QoQ credit growth in Q4FY25 and kept its cost-to-income ratio steady at 55%, but reported a higher credit cost due to accelerated provisioning in unsecured loans. The bank set aside Rs 1.5 billion for these segments, pushing credit costs to 2.4% from 2% QoQ.
Gross NPA (GNPA) improved marginally to 2.28% from 2.31%.
Net NPA (NNPA) fell to 0.74% from 0.91%.
Provision Coverage Ratio (PCR) rose to 68% from 61%.
ICICI Securities estimates credit cost will normalize to 75–85bps in FY26, which could support profitability and ROA stabilization.
Asset Quality Focus: Unsecured Segments Under Pressure, But Recovery Expected
Unsecured segments—MFI, credit cards, and PL—were the primary source of elevated provisions.
MFI credit cost stood at 8% in FY25.
Credit cards reported a striking 11% credit cost.
Retail secured loans remained stable with 93bps, while commercial banking was at 45bps.
The bank has implemented tightened underwriting norms, portfolio reviews, and merchant controls in credit cards, with expectations of normalization to 7–8% in FY26. In the MFI segment, credit costs are forecasted to moderate to 3–3.5%.
Business Composition: Growth Driven by Vehicle and MSME Loans
Despite stress in unsecured loans, the secured portfolio delivered:
Vehicle finance growth of 11% QoQ, particularly in tractors and used vehicles.
MSME loans up 6% QoQ, while home loans, NBFCs, and agri SME grew 6–7%.
Unsecured lending—MFI (-7%), PL (-11%), and credit card (-17%)—dragged the blended advance growth.
The bank expects a 20–25% credit growth in FY26, with a renewed focus on commercial banking and vehicle financing.
Deposits Surge Amid Competitive Pressures
AU SFB posted a 27% YoY deposit growth, outpacing its FY25 guidance of 23–24%. The bank maintained a stable CASA + retail TD ratio at 62%.
Current Account deposits grew 24% QoQ.
Savings Account deposits rose 2% QoQ.
CASA ratio moderated to 30%.
Cost of Funds (CoF) came in at 7.07%, better than earlier guidance of 7.20–7.25%.
In Apr’25, the bank pre-emptively reduced its SA rate by 25bps to offset a potential 50bps repo rate cut. This move positions AU favorably to preserve margins.
Q4FY25 Snapshot: Earnings and Balance Sheet Highlights
Here’s a quick glance at AU Small Finance Bank’s quarterly performance:
| Metric | Q4FY24 | Q4FY25 | YoY Change |
|---|---|---|---|
| Net Interest Income (NII) | Rs 13,371 mn | Rs 20,939 mn | +56.6% |
| Net Profit | Rs 3,708 mn | Rs 5,037 mn | +35.9% |
| Loan AUM | Rs 7,39,990 mn | Rs 10,87,800 mn | +47.0% |
| Deposits | Rs 8,71,821 mn | Rs 12,42,685 mn | +42.5% |
| GNPA | 1.7% | 2.3% | +60 bps |
Management Commentary: Regulatory Engagement and Long-Term Vision
AU SFB has submitted its application to become a universal bank and expects regulatory clarity in CY25. Management reiterated:
RoA guidance of 1.8% by FY27.
Will cap unsecured exposure at 15%, including 10% MFI.
Focus on AI-driven cross-sell and tech-enabled operational efficiencies.
Scaling commercial and retail secured portfolios, especially in southern India via Fincare SFB’s demographic reach.
Strategic Watch: Key Risks and Upside Triggers
Risks:
Higher-than-expected slippages in unsecured segments.
Loan growth deceleration if macro conditions deteriorate.
Triggers:
Faster recovery in unsecured portfolios.
Approval of universal bank license.
Credit cost moderation to sub-1% levels in FY26.
Continued traction in low-cost deposits.
Investor Takeaway on AU Small Finance Bank: Stable Core, Cautious Optimism
ICICI Securities’ BUY call with a target price of Rs 725 reflects confidence in AU Small Finance Bank’s ability to manage through short-term asset quality pressures. The bank's strategic pre-emptive moves, stable liability base, and clear long-term execution roadmap support a constructive view for long-term investors. While challenges in unsecured loans remain, the improving collection efficiency and steady secured book offer resilience in a volatile landscape.
For investors eyeing exposure to India’s rising retail and SME credit wave, AU SFB presents a balanced bet—one that pairs growth potential with evolving prudence.
