Nomura has updated its target price for AU Small Finance Bank to Rs 980, citing strong first-quarter operating profit that beat estimates. The bank reported a 37% year-on-year rise in net profit and maintained its return on assets guidance for FY27. Investors are monitoring the bank's ability to manage deposit costs while sustaining healthy loan growth.
Detailed Coverage
Nomura Securities has adjusted its outlook on AU Small Finance Bank following the lender’s June quarter results. The brokerage revised its target price for the stock to Rs 980, up slightly from Rs 975, while maintaining a neutral stance. This move follows a solid start to the fiscal year, where the bank’s core pre-provision operating profit reached Rs 13.5 billion, exceeding market expectations by 6%.
Earnings and Profitability Drivers
The bank’s net profit for the quarter rose 37% compared to the same period last year, reaching Rs 8 billion. This performance was supported by steady net interest income and effective control over operating expenses. Additionally, the bank’s adjusted net interest margin, which measures the difference between interest earned on loans and interest paid on deposits, increased by 5 basis points sequentially.
Asset quality also showed signs of improvement. Gross non-performing assets, or the value of loans that are not being repaid as scheduled, declined across the bank's digital unsecured and inclusive banking portfolios. Consequently, credit costs—the money set aside for potential loan losses—dropped to 109 basis points, down from the FY26 average of 140 basis points. These improvements led Nomura to raise its earnings per share estimates for the next two fiscal years by 3%.
Growth and Future Outlook
AU Small Finance Bank reported a 23% year-on-year growth in assets under management, with strong contributions from segments like MSME, commercial vehicle, auto, and gold loans. Deposit growth also remained healthy at 24% year-on-year, and the CASA ratio—the proportion of deposits in low-interest savings and current accounts—improved to 28.8%.
While the bank faces potential pressure from rising costs to attract deposits, management has kept its return on assets guidance for FY27 at 1.8%. Nomura expects the bank to maintain a compound annual growth rate of 23% for both loans and deposits through FY28.
For investors, the key monitorable remains the bank's ability to balance expansion in its loan segments against the competitive environment for deposit mobilization. While credit costs have moderated, the bank's performance will depend on maintaining this asset quality as the loan book scales. Future updates to watch include the sustainability of margin improvements and the actual execution of its long-term growth targets in the coming quarters.