AU Small Finance Bank Downgraded to Hold by ICICI Securities, Target Set at Rs 1010

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AuthorRiya Kapoor|Published at:
AU Small Finance Bank Downgraded to Hold by ICICI Securities, Target Set at Rs 1010
Overview

ICICI Securities downgraded AU Small Finance Bank to a 'Hold' rating, citing that current stock prices have largely priced in positive developments. The brokerage set a revised target price of INR 1,010, reflecting a valuation of 3.25 times its estimated March 2027 book value. This move comes despite the bank reporting a robust 19% year-on-year profit growth in Q3FY26, driven by expanding net interest margins and improving asset quality.

Q3FY26 Performance Beats Expectations

AU Small Finance Bank (AUSFB) reported a strong profit after tax (PAT) growth of 19% quarter-on-quarter for the fiscal third quarter of 2026. This performance was bolstered by an expanding net interest margin (NIM) and a sustained improvement in asset quality, particularly within its microfinance institution (MFI) and credit card portfolios.

Profitability and Margin Expansion

The bank's return on assets (RoA) surpassed the 1.5% mark, a level not seen in three quarters. Management expressed optimism about maintaining this improved profitability trajectory in the near term. The NIM expanded for a second consecutive quarter, reaching 5.7%, primarily due to a 22 basis point reduction in the cost of funds.

Asset Quality Improvement

Incremental stressed asset formation moderated significantly in Q2FY26, with the gross slippage ratio falling below 3%. This positive trend continued into Q3FY26, as the slippage ratio further decreased to below 2.5%. Concurrently, credit costs saw a substantial drop, falling to 0.8% in Q3FY26 from a peak of 2.3% in Q4FY25.

Outlook and Valuation Concerns

Despite the robust operational performance, ICICI Securities believes that most of the positive developments are already reflected in the current market price. The stock is trading at 3.2 times its estimated FY27 price-to-book value (PBV). Consequently, the brokerage has downgraded its rating on AU Small Finance Bank to 'Hold' from 'Buy'.

Revised Price Target

ICICI Securities has also revised its price target upwards to INR 1,010 from INR 925. This adjustment follows the rolling over of their valuation horizon to March 2027, with the target price assigned a multiple of 3.25 times the projected PBV. This implies limited potential upside from the current stock levels.

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