AU Small Finance stock slips 4% despite strong Q2 earnings

Deposits improved 49% year-on-year with good traction in CASA deposits. The CASA ratio rose to 42% from 30% in the same quarter last fiscal. Further, the bank’s net interest income (NII) grew 44% year-on-year and net interest margin (NIM) during the quarter rose 30 basis points sequentially to 6.2%. One basis point is 0.01%.

On the other hand, its slippage remains at a height 262 crores. In addition, its operating expenses were sped up as they grew 51% year over year. The increase in operating expenses was partially due to increased employee expenses. Management indicated that employee appraisals were done in 2QFY23, which led to higher employee costs, while digital investments kept other expenses higher. The cost-to-income ratio was 62.5% in the current quarter.

Analysts at HDFC Securities Ltd said, “AUBANK’s continued investment in franchisee manufacturing activities to position itself as a future-ready bank is keeping the cost ratio under pressure.” In a post earnings call with analysts, the bank’s management said, the focus is to keep the cost/earnings ratio around 60% going forward.

Meanwhile, management is focused on raising retail deposits and managing its margins. However, it is aware of macro-constraints and will remain cautious on developments. Management expects NIM to remain in the range of 5.8-6% going forward.

Note that the bank is awaiting RBI guidelines to apply for a Universal Banking License.

According to analysts at Emkay Global Financial Services Ltd, it would be prudent for the bank to further strengthen its risk/compliance architecture before its planned transformation to become a universal bank.