Emkay Global Financial has given Hold recommendation for AU Small Finance Bank with a target price of Rs. 1000 in its research report issued on Mar 10, 2021

Emkay Global Financial’s report on AU Small Finance Bank

According to media reports, AU Small Finance Bank (AU SFB) plans to raise ~Rs6.15bnRs6.32bn (US$0.08bn-US$0.09bn) at an indicative price band of Rs1,230-Rs1,265 vs. CMP of Rs1,231 (SEBI floor price: Rs1,181 per equity share). The issue will open on March 9 and close on March 10 by 8.30 am IST (with an option to close earlier). Despite lumpy stake sale in Aavas Financiers, AU SFB’s Tier 1/CRAR ratio, ex-9M profit, dropped to 16.3%/18.8% in Q3 while including profits stood at 20%/23.5%, mainly due to a sharp rise in RWA. AU SFB’s CAR is based on credit risk as the bank still enjoys the leeway to not maintain capital on operational/market risk. After the capital raise, Tier-1 ratio will increase by 244bps/251bps (based on Q3FY21 RWA). Though the capital ratios remain well above the regulatory requirement of 7.5%/15% even including operational/market risk-weighted assets, we believe the capital raise is primarily to fund future growth and also a preparatory measure to apply for Universal Banking license once it completes 5 years of operations as SFB in April 2022.

Outlook

We expect the bank to report healthy pre-money RoE of 23%/19%/20% over FY21/FY22/FY23, which post-money without factoring in the benefits of capital raised, should stand at 22%/17%/18%. At the higher QIP band of Rs1,265, the stock is valued at 5.3x FY23 ABV pre-money and 4.9x FY23 ABV post-money. Currently, we have a Hold rating on the stock, given rich valuations. Asset-quality movement too remains a key monitorable given its relatively vulnerable portfolio.