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Business momentum remains strong; margin compression cycle nearing end
* AUBANK’s PAT increased 42% YoY to INR1.18b (our estimate: INR1.05b) in 4QFY19. NII grew 35% YoY (+11% QoQ) to INR3.9b (3% beat), while margins compressed further by 20bp QoQ to 5.1%. For FY19, NII/PPoP/PAT grew ~43%/25%/31%. CI ratio stood at 60.0% in FY19 v/s 56.7% in the previous year.
* Other income grew 23% QoQ (-3% YoY) to INR1.3b, driven by an increase in core and distribution fees. Operating expenses increased 13% YoY (+9.6% QoQ) to INR3.0b, leading to a 232bp QoQ decline in the C/I ratio to 58.3%.
* AUM rose 51% YoY to INR242b, with strong disbursements growth in vehicle/MSME/NBFC books. Retail assets formed 82% of gross AUM. Retail AUM grew 13% QoQ, while wholesale AUM rose 9.0% QoQ, driven by NBFC book. Wheels/secured MSME/secured SME formed 42%/32%/4.0% of total AUM.
* Deposit base increased to INR194b, taking the CD ratio to ~117.5%. CASA ratio moderated to ~21%. CASA + retail TD now forms 45% of total deposits. The bank's average cost of funds stood at 8.0% in 4QFY19 (v/s 7.9% in 3QFY19).
* Fresh slippages were at INR1.52b (4.6% annualized), driving a 12% QoQ rise in GNPLs. However, GNPL/NNPL ratios fell 5bp/2bp QoQ to 2.04%/1.29%. Provisions grew 32%/21% YoY/QoQ to INR392m (in-line), while PCR was at 37.4%.
* Other highlights: (a) Tier-1 stands at 16.0%, with a total CAR of 19.3%. (b) The bank expects to achieve breakeven in branch banking by end-FY20.
* Valuation view: AUBANK is making strong progress in scaling up its business and alongside making adequate investments to support this momentum. We expect business growth to remain robust, while a gradual recovery in margins and costratios will support earnings over the medium term. We revise up our PAT assumption by ~9%/6% for FY20/21, now estimating a PAT CAGR of 40% over FY19-21. Maintain Buy with an unchanged TP of INR720 (4.4x FY21E BV).
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