AU Small Finance Bank Stock Analysis

AU Small Finance Bank Q3 FY20 Results Highlights

Introduction

In this article, we will analyse AU Small Finance Bank quarterly results update. Bank’s net profit has doubled to Rs.190 Cr for Q3 FY20 from Rs.95 Cr same quarter last year, driven by strong growth in Net Interest Income (NII) as well as Non interest income.

AU Small Finance Bank Quarterly Results – Q3 FY20

Company Overview

• AU Small Finance Bank is an Indian scheduled commercial bank that was founded as vehicle finance company AU Financiers (India) Ltd in 1996 and converted to a small finance bank on 19 April 2017.
• AU Small Finance Bank has a long-standing track record of over two decades of being a retail-focused and customer-centric institution; serving low and middle income individuals and micro / small businesses that have limited or no access to formal banking and finance channels.
• The Bank offers a comprehensive suite of loan, deposit & payment products and services.

Q3 FY2019-20 Results Highlights

• Net Interest Income is increased by 46% YoY and 12% QoQ as well driven by :
  • Growth in advances of 33%
  • Deposit growth of 75.4%
  • Reduced cost of funds
• Non-Interest Income growth is 52% YoY as well as 7% QoQ mainly because of :
  • Rise in Loan Asset processing fee 40% YoY
  • Rise in Income from Treasury Operations
• Operating profit is increased by almost 75% YoY on account of :
  • Increase in Balance sheet size by 38% YoY and 7% QoQ
  • Rise in efficiency of bank (Improved cost to income ratio)
• Provisions are reduced QoQ by 34% to Rs.40 Cr from Rs.61 Cr in last quarter with the improvement in asset quality.
• Net profit rise of almost 100% YoY and 11% QoQ is mainly due to
  • Strong Operating Profit growth 75% YoY and 13% QoQ
  • Improved Efficiency of bank

Q3 FY20 Balance sheet Summary

• Balance sheet size of AU Small Finance Bank has reached to Rs.38,394 Cr in Q3 FY20 with a strong growth of 38% YoY and 7% QoQ.
• Total Advances and Total Deposit growth were also steady with a year on year growth of 33% and 63% respectively.
• Since Deposits growth(63%) is much greater than advances growth(33%), the bank is having enough room for further advances growth without raising funds externally. Thus, the cost of funds has reduced sequentially QoQ as well as YoY in Dec-19 .

Key Ratios

Improved Asset Quality

• The asset quality of the bank has improved sequentially with Gross non-performing assets (Gross NPAs) fell to 1.88% in Q3 FY20 from 2.08% last year in Q3 FY19 and 2.01% last quarter Q2 FY20.
• While Net NPAs declined to 1.01% in Q3 FY20 from 1.31% in Q3 FY19 and 1.14% in Q2 FY20.
• With the consistent improvement in the asset quality of AU Small Finance Bank YoY as well as QoQ, Bank’s profitability is expected to boost in coming quarters.

CASA Ratio

• CASA Ratio reduced to 17% from 24% last year and improved slightly from 16% last quarter.
• The fall in CASA ratio is on account of following factors :
  • Total deposits have grown by 63% YoY and 8% QoQ, the contribution of CASA deposits in the total deposits was with comparatively lower growth rate, at 26%.
  • The share of Time deposits is higher, 83% and it has increased at a very good growth rate of 90.5% YoY, higher than even the growth rate of total deposits (63%)
  • It indicates total deposits are increased mainly on account of Term deposits.

Capital Adequacy Ratio (CAR)

• AU Small Finance Bank’s total Capital Adequacy Ratio (CAR) as per Basel III guidelines was at 19.3% as on December 31, 2019 from 17.9% as on September 30, 2019. CAR is well above the regulatory requirement level given by RBI.
• CAR has seen a flat growth to 19.3% in Q3 FY20 from 19% in Q3 FY19.

Cost to Income Ratio

• For Q3 FY20, the Cost to Income Ratio has improved consistently to 53.2% from 60.6% in Q3 FY19 and from 53.9% in Q2 FY20.
• Cost to income ratio of any bank tells how much cost is incurred to generate operating income of Rs.100 for the bank. The improvement in the cost to income ratio of AU Small Finance bank in Q3 FY20 indicates :
  1. The rise in operational efficiency of the bank
  2. Increased profitability as compared to Q3 FY19 & Q2 FY20

Net Interest Margin (NIM)

• Net Interest Margin (NIM) and the asset growth, both drives the Net Interest income of the bank.
• NIM for the 9 months of FY20 ie. (Q1 FY20 + Q2 FY20 + Q3 FY20) slightly declined to 5.4% from 5.8% in 9 months of FY19 (Q1 FY19 + Q2 FY19 + Q3 FY19)

Conclusion

• Amidst slowing macro economic environment, AU Small Finance bank’s steady growth and improving asset quality is an outcome of its:
  • Secured lending period
  • Diversified product mix
  • Growth opportunities in core markets and
  • Bank Pull
• The bank has shown strong progress on the business growth front and has made adequate investments to support growth momentum in parallel.
• Business growth of the bank is expected to remain robust, while stability in margins and cost control will likely support earnings over the medium term.