On Friday, Investec maintained a positive stance on AU Small Finance Bank Ltd (AUBANK:IN) stock, raising its price target to INR850.00 from INR800.00, while reaffirming a Buy rating. This adjustment follows the bank's reported earnings, which surpassed expectations, primarily due to reduced operating expenses and increased fee income.
The financial institution reported a profit after tax (PAT) of INR 5.7 billion, outperforming analyst estimates by 14%. The earnings beat was attributed to several factors, including a decrease in operating expenses and a surge in fee income. Analysts observed several key trends from the quarterly results, such as margins reaching their lowest point, cost-to-income (C/I) ratio peaking, and continued strong momentum in both fee income and loan growth. Additionally, the bank has shown robust momentum in its liabilities.
Despite the positive indicators, asset quality trends have shown signs of deterioration. However, Investec anticipates an improvement in pre-provision operating profit (PPOP) to average assets going forward. The bank's management has revised its credit cost guidance from 1.15% to 1.3%, introducing some uncertainty regarding the full-year credit costs. Still, the guidance is deemed credible based on the bank's track record.
AU Small Finance Bank's loan book is noted for being secured and diversified, with a relatively low proportion of unsecured loans at 11% of advances. Investec expects the bank to see earnings growth exceeding 30% from the financial year 2025 to 2027. The bank remains Investec's top pick within its lending coverage, citing the highest visibility in earnings among its peers.
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