Focus remains on building 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 almost its entire stake in accordance with the stated guidance of monetising. We value the stock at `1,100 (4.4x Sep’22E BV) and maintain ‘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 almost its entire stake with a mere 3,383 shares being held by it at present. The stake sale, at `1,527/share, represents a sale value of `5.3billion. Consequently, the book value 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-end.
AUBANK earlier highlighted that overall business activity had touched ~95% of pre-Covid levels, barring certain sectors — education, tourism, travel, and retail. This is led by a healthy uptick in the semi-urban and rural regions. Incremental disbursements in the Passenger Vehicle portfolio (Ola/Uber) have also picked up gradually. The management remains committed to building AUBANK into one of the best retail franchises. The bank plans to launch its credit card business in 4QFY21 and highlighted that its focus would remain on wheels, secured business loans (SBL) and housing finance segments, which are likely to comprise ~75% of lending over the next two-three years.
The management has stepped up its efforts on building a strong liability franchise, with an enhanced focus on growing its retail term deposits and CASA, which currently constitutes ~54% of total deposits (v/s 38% in FY19). The focus remains on growing in its core markets while following a selective approach in urban markets. The bank believes in ‘quality’ over ‘quantity’ which it has achieved by having a granular liability franchise. The credit-to-deposit ratio has improved to ~100% currently from 168% in FY18, and the bank aims to further improve this to 90% by Mar’23. It highlighted that cost of funds is likely to see a further reduction in 3QFY21, but is likely to stabilise sub-7% post 4QFY21.
Collection efficiency for the bank has been holding well, although the moratorium pool, which is yet to make any payments, is hovering ~3%. The management believes this pool is vulnerable and expects the upper range of slippages to be ~3%. To date, only one account has been restructured, while requests have been received for only certain accounts. Although the actual impact on asset quality is difficult to predict, it expects the overall impact to be limited. Therefore, the restructuring book is likely to remain range-bound. We expect 2.2%/0.6% GNPA/NNPA by FY22E. The bank believes its current provision buffer (~1% of total loans) is sufficient and would look to frontload provisions on an account-specific basis (where stress is visible). AUBANK reported a healthy performance over 2QFY21. Progress on collection efficiency has been particularly strong. A sharp decline in the moratorium book and improving collection trends eased concerns around asset quality. Current moratorium trends suggest ~3% of the portfolio remains vulnerable. On the business front, the retail deposit mix has improved sharply, while AUM growth is showing healthy recovery trends. We expect 2HFY21 to be better as the ongoing festive season should help revive demand in the economy. The current stake sale strengthens its capitalisation ratios, enabling the bank to undertake lending opportunities, while navigating the crisis efficiently. We estimate AUBANK to deliver RoA/RoE of 2.1%/17.5% in FY22E and expect credit cost of 1.7%/1.4% for FY21E/FY22E.