AU Small Finance Bank

Equity Research INDIA July 29, 2021 BSE Sensex: 52444 AU Small Finance Bank ADD ICICI Securities Limited Maintained is the author and Banking franchise gaining strength; digital journey distributor of this report being fast-tracked Rs1,173 Annual report analysis Key takeaway from AU Small Finance Bank’s (AU) FY21 annual report is the and target price revision display of business resiliency during challenging times. This is reflected in 38% YoY growth in deposits with 86bps decline in cost of funds and 22% YoY growth Financials in assets with best-in-class asset quality. Further, the bank remained focused on achieving the fastest growth to Rs1trn book size with a client base of >10mn from currently ~2mn. Journey to become a pan-India retail bank remained on track with Target price: Rs1,250 AU entering five new states and addition of >5,000 new members to further strengthen and fortify its workforce. It made significant strides towards becoming Target price revision a tech-led bank (digital opening of >90% of accounts, paperless two-wheeler Rs1,250 from Rs1,140 loans, and launch of AU 0101 super app). Maintain ADD with a revised target price of Rs1,250 (earlier Rs1,140). Shareholding pattern AU 0101- Digital banking app. Taking cognisance of ~750mn smartphone users in Dec Mar Jun India and ~1.2bn people with Aadhaar card, AU launched its digital banking app – ‘20 ‘20 ‘21 AU 0101. This app offers solutions around savings and fixed deposits, credit cards, Promoters 29.0 28.5 28.4 Institutional loans, investments, insurance, bill payments, and other lifestyle solutions such as investors 51.7 52.6 53.3 cab and flight bookings, recharge and tax payments. It also offer multiple channels MFs and UTI 10.4 10.8 11.6 FIs/Banks 0.0 0.0 0.0 of digital and contactless banking like video banking, WhatsApp banking, chatbot Insurance co. 1.2 5.4 4.4 banking, etc. Further, it rolled out multiple features like video banking, ticket FIIs 37.1 36.4 37.3 Others 19.3 18.9 18.3 bookings, bill payments, etc. to non-AU bank customers as well. The launch of the super app has driven significant uptick in digital adoption. Redefining branch banking. While continuing its focus on building a granular Price chart deposit base, AU incrementally focuses on acquiring quality customers (rather than 1,350 increasing numbers) with greater emphasis on CASA acquisition. Liability focus has 1,200 shifted from a one-size-fits-all approach to a more segment-based approach. 1,050 Specific teams have been set up to look after NRI banking, enterprise salary, 900 government banking, current account and TASC relationships to complement other 750 (Rs) segments. Products like ‘AU Platinum Family Banking’ allows it to target premium 600 customers. 450 Affordable housing segment gaining momentum. Post the process stabilisation 300 over past two years, affordable housing gained momentum in FY21 with monthly disbursements reaching Rs1.5bn by Q4FY21-end. AU currently offers affordable Jul-18 Jul-19 Jul-20 Jul-21 Jan-19 Jan-20 Jan-21 housing loans only at 135 locations while its existing overall presence is at ~600 locations. Focus on becoming a pan-India bank. In its effort to become a pan-India bank, AU, in FY21, added 37 branches across 15 states and two Union Territories with West Bengal, Uttar Pradesh, Telangana, Odisha and J&K being the newest additions to its rapidly expanding presence. It plans to be present in all the major capital cities by Mar’22 and believes its digital banking journey will be well complemented by the expanded physical footprint. Research Analysts: Market Cap Rs367bn/US$4.9bn Year to March FY20 FY21 FY22E FY23E Renish Bhuva Reuters/Bloomberg AUFI.BO/AUBANK IN NII (Rs mn) 19,094 23,654 28,700 34,848 [email protected] Shares Outstanding (mn) 312.8 Net Profit (Rs mn) 6,753 11,707 8,958 11,434 +91 22 6637 7465 Kunal Shah 52-week Range (Rs) 1356/616 EPS (Rs) 22.1 37.5 28.7 36.6 [email protected] Free Float (%) 71.6 % Chg YoY 76.9 73.4 (23.5) 27.6 +91 22 6637 7572 FII (%) 37.3 P/E (x) 53.2 31.3 40.9 32.0 Chintan Shah Daily Volume (US$/'000) 22878 P/BV (x) 8.2 5.8 5.2 4.5 [email protected] +91 22 6637 7658 Absolute Return 3m (%) 2.2 BVPS (Rs) 143 201 227 262 Piyush Kherdikar Absolute Return 12m (%) 49.5 Net NPA (%) 0.8 2.2 1.4 1.2 [email protected] Sensex Return 3m (%) +91 22 6637 7465 6.1 RoA (%) 1.8 2.5 1.6 1.7 Sensex Return 12m (%) 37.8 RoE (%) 17.9 22.0 13.4 15.0 Please refer to important disclosures at the end of this report AU Small Finance Bank, July 29, 2021 ICICI Securities Asset quality. AU entered FY21 with strong asset quality metrics. GNPA ratio wad down to 1.7% as at Mar’20 vs 2.0% in Mar’19 backed by contained slippages and strong recoveries in FY20. However, FY21 was by far the most challenging year not just for AU in its history, but probably for the overall environment in at least the past two decades (with nationwide lockdown impacting business activities significantly). As a result, GNPL ratio increased to 4.25% (90+ dpd at 2.7%) by Mar’21, within which GNPL in unorganised segment (~80% of loans) was higher at 4.7% and that in organised segment was much lower at 1.4%. Key risk – A) higher slippages from ~11% non-NPA moratorium pool and B) moderation in AUM growth. Table 1: Though ~80% of customers are predominantly in the unorganised segment, AU’s Mar’21 asset quality metrics reflect resiliency of this segment. As on March'21 Overall loan Loans to mainly Loans to mainly (Unless otherwise spesified) book unorganised segment organised segment Gross advances (Rs bn) 354 283 66 % of overall book 100%* 80% 20% Constituted primarily of Business Banking, Agri Remarks Wheels, SBL, Home Banking, NBFCs, REG, Loans Others Yields 13.9% 14.8% 10.0% Average ticket size of disbursements (Rs mn) 0.5 0.5 2.1 90+ dpd % - March'21 2.7% 2.9% 1.1% 90+ dpd % - March'20 1.6% 1.6% 0.7% GNPA % - March'21 4.3% 4.7% 1.4% GNPA % - March'21 1.7% 1.7% 0.7% Source: Company data, I-Sec research *SME book in rundown (Rs4.36bn) has been excluded from this analysis; including SME numbers, GNPA would be 2.6% and 1.5% respectively Chart 1: Collection efficiencies in FY21 against mobility indicators illustrates the correlation between AU’s collections and resumption in activity levels Source: Worldindata, Google mobility indicators (baseline days are the median value for the 5-week period from 3rd January to 6th February 2020) 2 AU Small Finance Bank, July 29, 2021 ICICI Securities Chart 2: Asset quality in New-to-Credit (formal) has been better than in seasoned customer segment 3.5 90+ dpd as on 31st March 2021 (%) 3.0 3.2 2.5 2.6 2.5 2.0 2.1 1.9 (%) 1.5 1.6 1.5 1.0 0.5 0.7 0.0 FY20 FY21 FY20 FY21 Wheels 90+ dpd SBL 90+ dpd Overall NTC Source: Company data, I-Sec research Chart 3: Incremental credit is performing much better; AU is displaying greater caution in customer and product profile selection As at March'21 Negligible ECLGS or 5.0 restructuring in loans originated in FY21 till 31st 4.5 4.5 March 2021. 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.1 Key highlights of 0.0 GNPL in total loans GNPL in loans originated in FY21 moratorium book: # Loans were originated Source: Company data, I-Sec research before 31st Mar’20 and primarily towards segments Chart 4:De-coding moratorium book; of total ~11% of non-NPA moratorium like commercial passenger book, ~44% of loans were current as on March’21 vehicles, schools, and De -coding moratorium book discretionary businesses like 16% public/social events related readymade garment shops, 14% 14% and hospitality. 12% # ~77% of incremental GNPA 10% 11% in FY21 was from 14% moratorium book. 8% 6% # Of ~11% non-NPA pool, ~44% of loans were current as 4% at 31st Mar’21. ATS of the non-NPA pool stood at 2% 3% Rs0.4mn as at 31st Mar’21 and was entirely secured, with 0% ~90% of loans in either SBL or Loans availing moratorium for NPA as on March'21 Non NPA as on March'21 4 months Wheels. Source: Company data, I-Sec research 3 AU Small Finance Bank, July 29, 2021 ICICI Securities Analytics-led lending – merchant solution with QR system. To boost analytics- based lending and current account onboarding, AU launched its merchant solutions with a QR ecosystem in FY21. It acquired >75,000 merchants within months of its launch, which indicates greater adoption of QRs (the bank attributes it to superior features of the offering). Supporting customers under ECLGS schemes. AU disbursed Rs5.6bn to >12,500 accounts under the Emergency Credit Line Guarantee Scheme (ECLGS 1.0). It also provided support to stressed customers by restructuring loans worth Rs6.4bn (>7,700 accounts) during FY21. Data analytics – for customer segmentation. Its focus on UYC (Understand Your Customers) principle instead of just KYC (Know your Customer) clubbed with data analytics has helped it improve customer experience, deepen engagement and generate better cross-sell and up-sell opportunities.

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