SELL

AU Small Finance Bank (AUBANK)

https://ultraviewer.et/en/own Banks MAY 02, 2021
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RESULT
Sector view: Attractive

Reality check. AU’s results were operationally strong with 30% yoy core operating CMP (`): 1,004
profit growth along with recovery in disbursements (13% qoq). However, overall stress Fair Value (`): 800
loan formation in FY2021 (~9% of opening loans) was higher than expectations.
BSE-30: 48,782
Further, with the second Covid wave impacting home markets and thin provision
buffers, outlook on growth and asset quality has turned cautious. With an unbalanced
risk-reward, we retain SELL rating on the stock and FV of Rs800 (unchanged).
AU Small Finance Bank
Stock data Forecasts/valuations 2021 2022E 2023E
CMP(Rs)/FV(Rs)/Rating 1,004/800/SELL EPS (Rs) 38.9 27.5 34.0
52-week range (Rs) (high-low) 1,354-366 EPS growth (%) 75.5 (29.5) 23.8
Mcap (bn) (Rs/US$) 314/4.3 P/E (X) 25.8 36.6 29.5
QUICK NUMBERS
ADTV-3M (bn) (Rs/US$) 1.7/0.1 P/B (X) 5.3 4.7 4.0
Shareholding pattern (%) BVPS 188.6 214.9 248.2
 NII up 18% yoy;
Promoters 29.0 RoE (%) 22.9 12.9 13.9
FPIs/MFs/BFIs 36.1/10.4/4.2 Div. yield (%) 0.0 0.0 0.0
PPOP (core) up
Price performance (%) 1M 3M 12M NII (Rs bn) 24 29 36 ~30% yoy; PBT up
Absolute (18.2) 15.1 84.5 PPOP (Rs bn) 21 15 19 19% yoy
Rel. to BSE-30 (17.0) 9.2 27.5 Net profits (Rs bn) 12 9 11
 Stress loans (NPL,
restructured, ECLGS)
Strong earnings growth despite rise in credit costs at 7% of AUM with
AU Bank delivered 19% yoy PBT growth (38% yoy PAT growth, on lower tax rate) driven by 18% 35% coverage
yoy operating profit growth and similar rise in loan-loss provisions. Revenue growth of 26% yoy
 Maintain SELL; FV at
was led by non-interest income (~50% yoy) and relatively lower NII growth (18% yoy) due to
Rs800 (unchanged)
the impact of interest reversals. Operating costs adjusting for one-off ESOP related expense was
18% yoy with staff cost growth of ~35% yoy (~30% yoy increase in headcount). The growth
momentum was sharp with 13% qoq disbursements growth driving 14% qoq AUM growth,
largely led by retail segments (20% yoy disbursement growth). Deposit side progress is on track
with ~30% qoq CASA growth and share of retail TD + CASA at 55% (57% at 3QFY21). NIM
(calc) declined 30/20 bps qoq/yoy to 5.3% while cost of funds declined 20 bps qoq to 6.5%.
Tier-1 ratio was 21.5%.
Heading into uncertain near term with a dented confidence

AU has closed the year (and first round of Covid) with nearly 9% stress addition (gross slippages,
restructured, ECLGS as % of FY2020 loans) – this is a worse-than-expected outcome Abhijeet Sakhare
considering earlier indications during the year (11% moratorium in June reducing to 3% by
October). The impact of second Covid wave between growth and asset quality is still uncertain M B Mahesh, CFA
(April collections lower by 5% vs normalized levels). AU’s book continues to churn at quick pace
(FY2021 disbursements at 60% of opening loans) and we would expect this book to exhibit
Nischint Chawathe
better behavior in the second wave. As such, the bank is carrying almost negligible provision
buffers. We make marginal changes to estimates with credit costs at ~1% for FY2022-23E. Our
Ashlesh Sonje
FY2022-23E earnings estimates are already ~15-20% below consensus.
Retain SELL on expensive valuations
Dipanjan Ghosh
We maintain SELL rating on the stock with FV of Rs800 (unchanged). We value AU at 3.2X
book and 23X FY2023 EPS for ~15% RoEs in the medium term. While near-term business
outlook appears hazy and could weigh on stock performance, over the medium term we see
the path beyond 15% as a challenge as business continues to demand growth investments. As
we have highlighted previously, elevated valuations imply less room for disappointments. We
believe risk-reward is more favorable with some of the other names under coverage to play
kspcg.research@kotak.com
recovery on the other side of Covid. Contact: +91 22 6218 6427

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Banks AU Small Finance Bank

Exhibit 1: AU SFB – quarterly summary

March fiscal year-ends, 4QFY20-4QFY21 (Rs mn)
(% chg.)
4QFY21 4QFY21E 4QFY20 3QFY21 4QFY21E 4QFY20 3QFY21 2021 2020 (% chg.) 2022E
Income statement (Rs mn)
Interest income 12,924 13,224 11,835 12,611 (2) 9 2 49,501 42,859 15 60,033
Interest/Discount on Advances/Bills 10,423 10,606 9,527 10,065 (2) 9 4 39,474 34,148 16 50,025
Interest on Investment 1,823 1,848 1,600 1,861 (1) 14 (2) 7,730 6,135 26 7,124
Interest on bal. with RBI & other inter bank funds 186 199 113 210 850 258 2,884
Other Interest 492 570 595 475 (14) (17) 4
Interest expense 6,365 6,438 6,285 6,280 (1) 1 1 25,846 23,769 9 31,093
Net interest income 6,558 6,787 5,549 6,331 (3) 18 4 23,655 19,089 24 28,939
Non interest income 2,766 1,859 1,831 6,634 49 51 (58) 14,515 7,061 106 6,770
Fee income 2,846 1,659 1,611 1,476 72 77 93 5,681 5,341 6
Treasury gains (80) 200 220 5,158 8,834 1,720 414
Total income 9,325 8,645 7,381 12,965 8 26 (28) 38,170 26,150 46 35,710
Operating expenses 5,587 5,084 4,223 4,237 10 32 32 16,584 14,179 17 19,936
Employee expenses 3,368 2,500 2,045 2,398 35 65 40 9,802 7,596 29 10,930
Other expenses 2,218 2,584 2,178 1,839 (14) 2 21 6,783 6,582 3 9,006
Operating profit 3,738 3,561 3,158 8,728 5 18 (57) 21,586 11,972 80 15,774
Operating profit (ex treasury) 3,818 3,361 2,938 3,570 14 30 7 12,752 10,252 24
Provisions 1,778 697 1,506 2,836 155 18 (37) 7,001 2,832 147 4,373
PBT 1,960 2,864 1,652 5,892 (32) 19 (67) 14,585 9,140 60 11,401
Tax 271 754 429 1,102 (64) (37) (75) 2,878 2,392 20 2,919
Net profit 1,690 2,111 1,223 4,790 (20) 38 (65) 11,707 6,748 73 8,483
Tax rate (%) 13.8 26.3 26.0 18.7 -1251 bps -1216 bps -490 bps 19.7 26.2 -644 bps 25.6
PBT (ex treasury) 2,040 2,664 1,432 734 (23) 42 178
PBT (ex treasury/one-offs & provisions) 3,368 3,281 2,588 3,490 3 30 (3)
Key balance sheet items (Rs bn)
Total deposits 360 316 262 297 14 38 21 360 262 38 450
Savings deposits 66 27 52 149 28 66 27 149 85
Current deposits 16 11 13 46 30 16 11 46 23
Term deposits 277 224 233 24 19 277 224 24 342
CASA ratio (%) 23.0 16.0 21.7 700 bps 130 bps
Investments 108.2 117 106.7 115.6 (7) 1 (6) 108.2 106.7 1 125.4
AUM 377 349 309 332 8 22 14 377 309 22 459
Retail Assets 317 259 283 22 12 317 259 22 390
Wholesale Assets 57 50 48 14 18 57 50 14 69
Disbursements 74 60 50 65 24 48 13 186 186 (0)
Asset quality (Rs mn)
Gross NPL 15,028 4,578 3,027 228 396 15,028 4,578 228 18,457
Net NPL 7,555 2,173 727 248 939 7,555 2,173 248 8,463
Gross NPL (%) 4.3 1.7 1.0 257 bps 326 bps 4.3 1.7 4.2
Net NPL (%) 2.2 0.8 0.2 137 bps 194 bps 2.2 0.8 1.9
PCR (%) 50 53 76 -280 bps -2626 bps 50 53 54
Slippage 12,440 810 60 1,436 20,633 10,268
Slippage (%) 16.4 1.2 0.1 1521 bps 1634 bps 2.8
Capital adequecy (%)
CAR 23.4 22.0 18.8 140 bps 460 bps 22.0
Tier- I 21.5 18.4 16.3 310 bps 520 bps 18.4
Key calculated ratios (%)
Yield on AUM 12.8 13.6 14.2 14.0 -138 bps -115 bps 13.7 13.7 4 bps 12.0
Yield on investment 6.5 6.4 6.6 6.5 -13 bps -1 bps 8.6 6.9 172 bps 6.1
Cost of funds 6.2 6.5 7.3 6.6 NA NA 7.3 7.4 -9 bps 6.4
NIM 5.3 5.7 5.5 5.6 -17 bps -25 bps 5.6 5.1 51 bps 5.0
Cost-income 59.9 58.8 57.2 32.7 270 bps 2723 bps 43.4 54.2 -1077 bps 55.8
CD ratio 96.2 101.9 103.2 102.0 -698 bps -578 bps 96.2 103.2 -698 bps 97.3

Source: Company, Kotak Institutional Equities estimates

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

AU Small Finance Bank Banks

Loan growth at 14% qoq; disbursement growth at 13% qoq

 AU SFB reported 22% yoy AUM growth. Sequential loan growth was strong at 14% qoq,
driven by strong 13% qoq disbursement growth during the quarter. 4QFY21 was strong
from a demand recovery point of view. However, the outlook has turned cautious again
given the rise of Covid cases in AU’s home markets this time.

 Within segments, retail grew 22% yoy while wholesale grew 14% yoy. Wheels and small
business loans grew by 16% and ~25% yoy. Banking products such as home loans,
personal loans, business banking, etc. continue to grow off a low base. Retail comprises
~85% of total AUM.

Exhibit 2: AUM growth at 22% yoy Exhibit 3: Disbursements rebound

Assets under management, March fiscal year-ends, 3QFY18-4QFY21 Disbursements, March fiscal year-ends, 3QFY18-4QFY21

AUM (LHS) YoY (RHS) Disbursements (LHS) YoY (RHS)

(Rs bn) (%) (Rs bn) (%)
380 100 91
80 100
63
304 80 56 48
64 40 34
65 64 50
62
20 15 21
228 51 60 48 (1)
44
38 37 0
(28)
152 40 32
27
22
17 (71) (50)
76 10 11 20 16

134 160 177 202218 242 256 279 299 309 300 306 332 377 26 42 29 41 40 50 40 47 49 50 12 34 65 74
0 0 0 (100)
3QFY18

1QFY19
2QFY19
3QFY19
4QFY19

2QFY20

4QFY20
1QFY21

3QFY21
4QFY18

1QFY20

3QFY20

2QFY21

4QFY21
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21

Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Banks AU Small Finance Bank

Exhibit 4: Share of retail assets has been increasing over the past seven quarters
Segment-wise AUM growth and mix, March fiscal year-ends, 1QFY19-4QFY21
1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 YoY (%) QoQ (%)
AUM (Rs bn)
Wheels 77.1 85.5 93.5 102.2 108.1 114.3 124.1 129.9 124.3 123.3 135.5 150.8 16 11
SBL-MSME 56.6 62.3 69.3 78.7 85.1 95.3 104.7 112.9 112.6 118.9 128.7 143.3 27 11
Home loans 0.0 0.1 0.4 1.2 2.1 3.3 4.6 5.7 5.6 7.1 9.9 15.1 166 53
Total Retail Assets 135.2 153.5 166.7 188.1 201.2 220.5 243.0 258.9 251.7 258.2 283.2 316.8 22 12
REG 7.5 7.2 7.6 8.0 8.0 8.2 8.2 8.3 8.0 7.4 6.5 7.5 (9) 17
BB 4.7 5.5 6.6 8.1 8.1 9.0 9.6 10.8 10.7 12.3 13.9 18.9 74 35
Agri SME 7.7 7.7 8.6 9.9 10.0 10.7 11.3 12.1 11.9 13.0 13.8 15.1 24 9
NBFC 18.2 26.0 23.6 25.1 25.8 25.1 20.9 18.6 15.1 14.8 13.9 15.1 (19) 9
Total SMC assets 38.0 46.5 46.4 51.1 51.9 53.0 49.9 49.8 45.7 47.4 48.0 56.6 14 18
Total AUM 177.5 202.2 217.7 242.5 256.1 278.8 298.7 308.9 300.4 305.6 332.2 377.1 22 14
AUM mix (%)
Wheels 43 42 43 42 42 41 42 42 41 40 41 40
SBL-MSME 32 31 32 32 33 34 35 37 37 39 39 38
Home loans 0 0 0 0 1 1 2 2 2 2 3 4
Total Retail Assets 76 76 77 78 79 79 81 84 84 84 85 84
REG 4 4 4 3 3 3 3 3 3 2 2 2
BB 3 3 3 3 3 3 3 3 4 4 4 5
Agri SME 4 4 4 4 4 4 4 4 4 4 4 4
NBFC 10 13 11 10 10 9 7 6 5 5 4 4
Total SMC assets 21 23 21 21 20 19 17 16 15 16 14 15
Total AUM 100 100 100 100 100 100 100 100 100 100 100 100

Source: Company, Kotak Institutional Equities

Exhibit 5: AUM growth to resume over FY22-234

AUM growth, March fiscal year-ends, 2015-2024E

(Rs bn) AUM (LHS) YoY (RHS) (%)

800 75

640 60
47.7 49.4 49.2

480 45

30.6 29.0
320 23.1 23.8 24.0 30
21.0

160 15

56 82 107 160 239 309 373 459 569 705

0 0
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities

About 7% stress loans with ~35% provision cover

 AU reported FY2021 slippages of 4.7% of last year loans. Excluding the pro-forma NPLs,
4QFY21 slippages were 5.5% annualized. Overall GNPL ratio was 4.3% and another 1.8%
in restructured loans.

 The bank explained that about one-third of the GNPL book is <90 dpd as of March-end
and was recognized as NPL due to daily NPL tagging of accounts. Of this pool, about 60%
is overdue in the 60-90 bucket.

 Provision coverage on NPL is 50% compared to 53% at 4QFY20. The bank has 18%
coverage on restructured loans. Excess provisions beyond this are negligible.

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

AU Small Finance Bank Banks

 We keep credit cost estimates at ~1% levels for the next few years, but subject to risk of
upwards revisions if the impact of the second Covid wave turns out to be worse than
expected.

Exhibit 6: AU has ~35% coverage on stress loans

Stress loans calculation, March fiscal year-ends, 3QFY21-4QFY21 (Rs mn)

(Rs mn) (% of 4QFY20 AUM)

3QFY21 4QFY21 3QFY21 4QFY21
Total stress book 21,158 26,438 7.8 9.8
Gross NPL 11,160 15,028
Restructured loans 4,998 6,410
ECLGS (estimate) 5,000 5,000

Provisions 7,780 9,324 2.9 3.5

NPL 6,250 7,474
Restructured 480 1,150
Contingent 1,050 700

Coverage on stress loans (%) 37 35

Source: Company, Kotak Institutional Equities

Exhibit 7: Customer activation levels are close to pre-Covid levels

Collection efficiency and share of customers repaying, March fiscal year-ends, 4QFY20-4QFY21 (%)

Source: Company, Kotak Institutional Equities

Exhibit 8: GNPL increase in 4QFY21 from the <90 dpd pool

Collection efficiency and share of customers repaying, March fiscal year-ends, 4QFY20-4QFY21 (%)

Mar-21 Dec-20
Loans Provisions Coverage Loans Provisions Coverage
GNPL 15,030 7,470 50 11,160 6,250 56
>90 dpd 9,620 5,680 59 10,170 6,250 61
<90 dpd 5,410 1,790 33 990 - -
Restructured 641 1,150 179 2,510 480 19
Contingency provisions 700 1,080

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

Banks AU Small Finance Bank

Exhibit 9: Gross NPL at 4.3% Exhibit 10: Credit costs spike

Asset quality metrics, March fiscal year-ends, 3QFY18-4QFY21 (%) Credit cost and slippages, March fiscal year-ends, 3QFY18-4QFY21
(%)
GNPL NNPL PCR (RHS)
Slippage Credit cost (RHS)
5.0 71 75
12 3.6 4.0
64
4.0 61 66
10 3.2
3.0 53 57 2.4
50
2.2 7 2.0 2.0 2.4
1.9 47
2.0 44 48
1.3 1.4 1.3 1.3 1.3 40
1.3 1.1 1.2 5 1.6
37 37 38 38 37 1.0 1.0
0.8 0.8 0.8 0.7 0.9
1.0 34.4 0.6 39 0.8
0.5 0.6 0.7 0.5 0.6
2 0.8
2.8 2.0 2.2 2.0 2.1 2.0 2.1 2.0 1.9 1.7 1.7 1.5 3.1 4.3
0.0 30 3.2 1.9 3.0 2.5 2.3 3.0 2.5 2.5 2.1 1.2 0.1 0.4 11.9 5.7
3QFY18
4QFY18

2QFY19
3QFY19
4QFY19

2QFY20
3QFY20

1QFY21
2QFY21

4QFY21
1QFY19

1QFY20

4QFY20

3QFY21

0 0.0

3QFY18
4QFY18

2QFY19
3QFY19
4QFY19

2QFY20
3QFY20

1QFY21
2QFY21
3QFY21
1QFY19

1QFY20

4QFY20

4QFY21
Source: Company, Kotak Institutional Equities
Source: Company, Kotak Institutional Equities

Exhibit 11: NPLs to stabilize in FY2022E Exhibit 12: Higher slippages and credit costs in FY2021
Asset quality metrics, March fiscal year-ends, 2016-2024E (%) Slippages and credit cost, March fiscal year-ends, 2016-2024E (%)

GNPL (LHS) NNPL (LHS) PCR (RHS) Slippages (LHS) Credit cost (RHS)
5.0 5.0 4.0
84

4.0 63 70 4.0 3.2

58
53 54
50 56
3.0 3.0 2.1 2.4
40
35 37 37
4.4 42
2.0 4.2 2.0 1.6
1.8 3.8
3.5 1.0 1.0 1.1 1.0 1.0
28 1.0
0.7
1.0 0.7 2.0 2.0 1.0 0.8
1.7 14
0.6
0.4 1.2 1.3 1.3 0.8 2.2 1.9 1.6 1.3 1.0 1.9 3.1 3.4 2.7 4.7 2.8 2.5 2.5
0.0 0 0.0 0.0
2023E
2022E

2024E
2016

2017

2018

2019

2021
2020

2023E

2024E
2022E
2016

2018

2019

2021
2017

2020

Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates

Margins decline qoq; cost of funds continues to slide

 NIM (reported) declined 10 bps qoq to 5.3% on 20 bps qoq decline in cost of funds to
6.5% due to pass-through of deposit rate cuts and higher CASA. While yields also
declined by a similar on account of interest reversals. The bank also reduced the excess
liquidity with lower LCR at 116% compared to 150% peak at June 2020.

 The bank’s customer segment offers strong pricing power, reflecting in yields remaining
in the 14-15% range over the past few quarters. Incremental yields at 13.8% were much
lower than book yields, possibly due to customer selection and decline in rates overall.
Incremental cost of funds has declined by ~130 bps yoy to 5.9%.

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

AU Small Finance Bank Banks

 We factor in NIM to remain stable at FY2020 levels of ~5.2% as the liability franchise
remains on an improving trajectory and pricing power remains strong on the retail asset
side of the business.

Exhibit 13: NIM to remain stable over FY2021-22E

Yield, cost of funds and NIM, March fiscal year-ends, 2014-2024E (%)

Yield on advances (LHS) Cost of funds (LHS) Spread (RHS) NIM (RHS)
25 14
12.3 12.2
11.0
10.7 12
20 10.1
9.0 9.3
10

15
6.9 8
5.8 6.4 6.3 6.3 6.4 6.3
5.2 5.4 5.2 5.2 5.2 5.2 5.2 6
10

4
12.5 11.3 2.3
5 10.3
8.3 7.3 7.4 7.4 2
6.5 6.4 6.3 6.2
23.2 20.3 19.7 13.5 9.5 13.1 13.7 12.8 12.8 12.7 12.5
0 0
2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E 2024E

Source: Company, Kotak Institutional Equities estimates

Deposit growth momentum continues; CASA ratio improves to 23%

 AU SFB reported 38% yoy growth in overall deposits driven by 2.5X yoy growth in SA, 46%
yoy growth in CA and 30% yoy growth in retail term deposit. The bank utilized the
opportunity to reduce reliance on wholesale deposits as retail TD still grew ~50% yoy.

 The bank’s deposit strategy is skewed towards tapping urban markets which contribute
~75% of deposits tapping corporate deposit pools. Granularity is gradually improving
with falling ticket sizes in retail term and savings deposits. Share of bulk deposit is 9% is
SA and 56% in TD.

 Top-3 states, i.e. Maharashtra, Rajasthan and Delhi NCR, contribute 70% of deposits.
Retail deposits comprise 55% of total deposits compared to 43% at March 2020.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

Banks AU Small Finance Bank

Exhibit 14: Deposit growth strong at 38% yoy Exhibit 15: Term deposits dominate funding mix
Deposits, March fiscal year-ends, 4QFY18-4QFY21 Funding mix, March fiscal year-ends, 1QFY18-4QFY21 (%)
Deposits (LHS) YoY (RHS)
(Rs bn) (%) CA SA TD Borrowings
145
400 150 100
16
24
31 31 28 27 28 30 27
320 120 80 41 38 38
99 49
66
240 90 60 79
72
63 64
60
40 56 57 61 62 61 60 58
160 60 46 49 50
35 35 38 37
22 24 20 21
80 30 14
13 15
5 11
11 11 12 10 9 9 8 9 7 8 12
194 198 221 239 262 267 270 297 360 0 1 2 3 2 2 2 4 3 2 3 3 2 3 3 4
0 0

2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
4QFY19

1QFY20

2QFY20

3QFY20

4QFY20

1QFY21

2QFY21

3QFY21

4QFY21

Source: Company, Kotak Institutional Equities

Source: Company, Kotak Institutional Equities

Exhibit 16: Building in stable cost ratios over FY2021-23E Exhibit 17: Opex growth in line with business growth
Cost ratios, March fiscal year-ends, 2015-2024E Branches and operating expenses, March fiscal year-ends, 2015-
2024E
Cost-income (LHS) Cost-average assets (RHS)
Branches (LHS) Operating expenses yoy (RHS)
65 12.5 (#) (%)
1,000 150
52 10.0
113
800 120
39 7.5
4.9 5.3 600 90
4.4 4.4 4.2 63
26 3.8 3.5 3.5 3.5 3.4 5.0
400 44 60
35 39
13 2.5 31
20 23 21
200 17 30
36.6 40.9 32.8 56.7 60.0 54.2 43.4 55.8 55.2 54.2
0 0.0 231 291 301 377 408 528 729 829 929 1,029
2015

2017

2018

2019

2021
2016

2020

2022E

2023E

2024E

0 0
2022E

2023E

2024E
2015

2016

2018

2019

2020
2017

2021

Source: Company, Kotak Institutional Equities estimates

Source: Company, Kotak Institutional Equities estimates

Other key highlights of the quarter

 Costs grow ~30% yoy. Operating expenses grew ~32% yoy, driven by 65% yoy growth
in staff costs and 2% yoy growth in non-staff expenses. Staff costs had one-off impact of
ESOP-related expense. Incremental costs are probably driven by higher disbursements qoq
as well collection efforts. Over the medium term, we expect cost-income ratio of ~55%
as need to expand presence and investments in new products will continue to drive costs.

 Non-interest income up ~50% yoy. Non-interest income witnessed growth due to

PSLC fees as well as growth in lending-related fees.

 Capital position comfortable. Capital position is comfortable with CAR at ~23% and
tier-I ratio at ~21%.

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

AU Small Finance Bank Banks

Exhibit 18: Summary of estimate changes

Estimate changes for AU Small Finance Bank, March fiscal year-ends, 2022E-2024E

New estimates (Rs mn) Old estimates (Rs mn) Old versus new (%)
2022E 2023E 2024E 2022E 2023E 2022E 2023E
AUM growth (%) 23 24 24 23 24 -28 bps 14 bps
Net interest income 28,939 35,915 44,171 28,914 35,521 0 1
NIM (%) 5.2 5.2 5.2 5.4 5.3 -21 bps -9 bps
Other income 6,770 8,314 10,231 6,511 7,989 4 4
Treasury 500 525 550 500 525 — —
Others 6,270 7,789 9,681 6,011 7,464 4 4
Total income 35,710 44,229 54,402 35,424 43,510 1 2
Operating expenses 19,936 24,431 29,478 20,029 24,464 (0) (0)
Loan loss provisions 4,373 5,141 6,370 3,898 4,814 12 7
PBT 11,401 14,657 18,554 11,497 14,232 (1) 3
PAT 8,483 10,905 13,804 8,554 10,589 (1) 3
PBT-treasury+provisions 10,901 14,132 18,004 10,997 13,707 (1) 3
EPS (Rs) 27.2 34.9 44.2 27 34 (1) 3
ABVPS (Rs) 209 243 287 215 248 (3) (2)

Source: Kotak Institutional Equities estimates

Exhibit 19: AU is trading at 4.8X one year-forward book

Rolling one-year forward PER and PBR, March fiscal year-ends, Aug 2017-April 2021 (X)

Rolling PER (X) (LHS) Rolling PBR (X) (RHS)

70 8.5

56 6.8

42 5.1

28 3.4

14 1.7

0 0.0
Aug-17

Aug-18

Aug-19

Aug-20
Oct-17
Dec-17

Oct-18

Apr-19

Oct-19
Dec-19

Oct-20

Apr-21
Apr-18

Dec-18

Apr-20

Dec-20
Feb-18

Feb-19

Feb-20

Feb-21
Jun-18

Jun-19

Jun-20

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

Banks AU Small Finance Bank

Exhibit 20: AU SFB – key growth rates and ratios

March fiscal year-ends, 2018-2024E (%)

2018 2019 2020 2021E 2022E 2023E 2024E

Key growth rates (%)
Interest income 38 67 45 15 21 23 22
Interest on loans 13 151 44 16 27 26 24
Interest on securitised loans 110 (51) 10 1 (20) (30) (30)
Interest expenses 67 94 48 9 20 22 20
NII 20 43 42 24 22 24 23
Other income (52) 19 53 106 (53) 23 23
Fee income 71 89 35 (1) 25 25 25
Treasury income (94) (41) 680 412 (94) 5 5
Operating expenses 113 44 31 17 20 23 21
Employee expenses 120 41 26 29 12 22 22
Loan loss provisions 33 10 99 147 (38) 18 24
PBT (61) 31 57 60 (22) 29 27
Taxes (53) 31 21 20 1 29 27
PAT (64) 31 77 73 (28) 29 27
PBT-treasury (13) 38 33 (22) 90 30 27
PBT-treasury+provisions (5) 30 46 24 20 26 26
Key calculated ratios (%)
Yield on loans 9.5 13.1 13.7 12.8 12.8 12.7 12.5
Yield on investment 4.9 6.5 6.9 5.7 6.1 6.1 6.1
Yield on average earning assets 12.9 11.8 11.8 10.9 10.7 10.7 10.6
Interest on deposits 3.9 6.6 7.0 6.6 6.4 6.3 6.3
Cost of funds 7.3 7.4 7.4 6.5 6.4 6.3 6.2
Spread 5.6 4.5 4.4 4.4 4.3 4.4 4.4
NIM 6.9 5.4 5.2 5.2 5.2 5.2 5.2
Credit cost 1.0 0.7 1.0 2.1 1.1 1.0 1.0
Interest income/ total income 71 74 73 62 81 81 81
Non-interest income/ total income 12.6 17.6 16.4 11.1 14.9 15.0 15.3
Cost-to-income 57 60 54 43 56 55 54
Cost-to-average assets 5.3 4.2 3.8 3.5 3.5 3.5 3.4
Asset quality ratios (%)
GNPL (Rs mn) 2,697 4,701 4,578 15,036 18,457 21,189 24,336
GNPL ratio 2.0 2.0 1.7 4.4 4.2 3.8 3.5
NNPL (Rs mn) 1,693 2,945 2,173 7,555 8,463 8,811 9,000
NNPL 1.3 1.3 0.8 2.2 1.9 1.6 1.3
RoE tree (%)
NII 6.6 5.2 5.1 5.0 5.0 5.1 5.1
Other income 2.7 1.8 1.9 3.1 1.2 1.2 1.2
Total income 9.3 7.0 7.0 8.1 6.2 6.3 6.3
Operating expesnes 5.3 4.2 3.8 3.5 3.5 3.5 3.4
Employee expenses 3.0 2.3 2.0 2.1 1.9 1.9 1.9
PPOP 4.0 2.8 3.2 4.6 2.7 2.8 2.9
PBT 3.1 2.3 2.4 3.1 2.0 2.1 2.1
(1- tax rate) 0.7 0.7 0.7 0.8 0.7 0.7 0.7
RoA 2.0 1.5 1.8 2.5 1.5 1.5 1.6
Average assets/ equity 6.7 9.5 9.9 8.8 8.6 9.2 9.7
RoE 13.7 14.0 17.9 22.0 12.7 14.2 15.5

Source: Company, Kotak Institutional Equities estimates

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

AU Small Finance Bank Banks

Exhibit 21: AU SFB – key financials

March fiscal year-ends, 2018-2024E (%)

2018 2019 2020 2021E 2022E 2023E 2024E

Income statement (Rs mn)
Interest income 17,670 29,491 42,859 49,501 60,033 73,722 89,699
Interest on loans 9,475 23,742 34,148 39,474 50,025 62,808 77,743
Interest on securitised loans 3,030 1,488 1,637 1,658 1,319 923 646
Interest on investment 1,285 3,339 6,135 6,073 7,124 8,142 9,131
Others 3,880 923 939 2,297 1,565 1,849 2,179
Interest expenses 8,267 16,066 23,769 25,846 31,093 37,807 45,529
Interest on deposits 1,557 8,991 16,055 20,448 25,836 31,762 38,536
Others 6,710 7,074 7,715 5,398 5,257 6,045 6,993
NII 9,403 13,426 19,089 23,655 28,939 35,915 44,171
Other income 3,881 4,619 7,061 14,515 6,770 8,314 10,231
Fee income 1,679 3,181 4,291 4,250 5,313 6,641 8,301
Treasury income 376 221 1,726 8,834 500 525 550
Others 1,826 1,217 1,044 1,431 958 1,149 1,380
Total income 13,283 18,045 26,150 38,170 35,710 44,229 54,402
Operating expenses 7,526 10,824 14,179 16,584 19,936 24,431 29,478
Employee expenses 4,249 6,011 7,596 9,802 10,930 13,323 16,241
Others 3,277 4,813 6,582 6,783 9,006 11,108 13,237
PPOP 5,757 7,221 11,972 21,586 15,774 19,797 24,924
Provisions and contigencies 1,326 1,418 2,832 7,001 4,373 5,141 6,370
PBT 4,432 5,803 9,140 14,585 11,401 14,657 18,554
Taxes 1,513 1,983 2,392 2,878 2,919 3,752 4,750
PAT 2,919 3,820 6,748 11,707 8,483 10,905 13,804
Tax rate (%) 34 34 26 20 26 26 26
PBT-treasury 4,056 5,582 7,414 5,751 10,901 14,132 18,004
PBT-treasury+provisions 5,381 7,000 10,246 12,752 15,274 19,272 24,374

Balance sheet (Rs mn)

Cash and bank balance 17,612 17,402 33,697 47,813 56,539 66,709 78,561
Investment 30,506 71,617 106,682 108,154 125,408 141,530 157,855
Net loans and adavnces 133,121 228,187 269,924 346,089 437,775 553,440 694,665
Fixed assets 3,861 4,470 4,480 4,824 5,960 5,891 5,673
Other assets 3,227 4,552 6,648 9,033 9,936 10,930 12,023
Net assets 188,328 326,228 421,431 515,913 635,618 778,500 948,776
Deposits 79,233 194,224 261,639 359,793 450,062 554,787 675,957
Current 3,920 10,820 11,140 16,320 22,665 30,713 40,800
Fixed 57,893 158,324 223,769 277,043 342,050 416,094 500,212
Savings 17,420 25,080 26,730 66,430 85,347 107,980 134,944
Borrowings and bills payable 76,935 86,515 103,645 70,297 86,636 108,351 137,009
Other liabilities 9,348 13,860 12,379 23,071 27,685 33,222 39,866
Total liabilities 165,516 294,599 377,663 453,161 564,383 696,361 852,832
Share capital 2,857 2,924 3,041 3,122 3,122 3,122 3,122
Reserves and surplus 19,955 28,705 40,727 59,630 68,113 79,017 92,821
Shareholder' equity 22,812 31,629 43,768 62,752 71,235 82,139 95,943

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

Disclosures

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70%
Equities, within the specified category.

60%
Percentage of companies within each category for which Kotak
Institutional Equities and or its affiliates has provided
50%
investment banking services within the previous 12 months.

40% * The above categories are defined as follows: Buy = We

32.5% expect this stock to deliver more than 15% returns over the next
27.4% 12 months; Add = We expect this stock to deliver 5-15% returns
30%
23.6% over the next 12 months; Reduce = We expect this stock to
deliver -5-+5% returns over the next 12 months; Sell = We
20% 16.5% expect this stock to deliver less than -5% returns over the next
12 months. Our target prices are also on a 12-month horizon
basis. These ratings are used illustratively to comply with
10%
3.8% 4.7% applicable regulations. As of 31/12/2020 Kotak Institutional
2.8%
0.5% Equities Investment Research had investment ratings on 212
0% equity securities.
BUY ADD REDUCE SELL

Source: Kotak Institutional Equities As of March 31, 2021

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our Fair Value estimates are also on a 12-month horizon basis.

Our Ratings System does not take into account short-term volatility in stock prices related to movements in the market. Hence, a particular Rating may not
strictly be in accordance with the Rating System at all times.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and fair value, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)
and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction
involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and fair value, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or fair value. The previous investment rating and fair value, if any, are no longer in effect for this stock
and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Corporate Office Overseas Affiliates
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