AU Small Finance Bank eyeing an upgrade. What should investors do?

Shares of AU Small Finance Bank (AUBANK) are set for an upgrade as domestic brokerage firm Asit C. Mehta Investment Interrmediates initiated coverage on the stock with a ‘Hold’ rating and set a target price of Rs 794.

The report highlights the bank’s strong operational footing, expanding secured loan base, and its upcoming transformation plans, including its application for a universal banking license, which the brokerage believes could be the next major growth trigger.

According to the note, AU Small Finance Bank has shown considerable resilience, backed by a higher proportion of secured assets, and maintains a loan book profile closer to that of a universal bank rather than a traditional small finance bank. The bank has been a strong player in mortgage and vehicle loans and is now expanding its presence in other financing verticals.

“The bank’s loan portfolio continues to grow at a trend, and higher than the industry,” the report stated. It added that deposits, too, are growing steadily and remain above the industry average.

Further, the brokerage firm believes that the universal bank license will be the next trigger for growth. The brokerage highlighted that AU Small Finance Bank has expressed its intent to transition into a universal bank and has already applied for the same.

Once granted, the license is expected to improve AU’s brand visibility, expand its customer funnel, and importantly, lower its cost of funds by bringing deposit rates closer to those of large banks.

It would also give AU the flexibility to diversify its loan book as restrictions around priority sector lending (PSL) will be eased, while enabling more avenues for fee and commission-based income.

As per Asit Mehta’s estimates, AU Small Finance Bank is expected to maintain strong momentum in its loan and deposit growth. It projects the bank’s advance/deposit to grow at a CAGR of 25%/23% over FY25–FY27E.

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Additionally, Net Interest Margin (NIM) is expected to remain stable at 5.9% in FY27E, in line with FY25 projections. The report also forecasts the bank’s ROA/ROE to reach 1.7%/16.4% by FY27E.

In the short term, the brokerage sees fixed-rate loans playing a crucial role in shielding the bank’s margins from rising interest rate volatility. The report notes that nearly 70% of the bank’s loan book is linked to fixed rates, compared to peers where fixed-rate loans typically range from 25–30%.

“The fixed-rate loans would protect the bank in the moderating interest rate scenario,” the brokerage firm stated.

Another key strength lies in the quality of AU Bank’s lending. The bank has a 91% share of secured loans in its total loan book, with unsecured loans forming only a small 9% portion.

“Around 90% of the bank’s advances are backed by collateral, including vehicles, residential or commercial property or gold,” the brokerage noted, calling the portfolio “inherently resilient.”

The higher secured loan share is seen as a cushion against potential credit risk and offers earnings stability across market cycles. As the bank continues to grow, its expansion into higher-yielding segments could unlock further growth while maintaining asset quality due to its conservative approach.

Around 2:30 pm, the shares of AU Small Finance Bank were trading flat at Rs 766.10 on the BSE.

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