Brokerages have turned cautious on AU Small Finance Bank after its Q1FY26 results revealed a weaker-than-expected operational performance, led by a sharp decline in margins, higher credit costs, and continued stress in the MFI, credit card, and south-based mortgage segments.
CITI – Neutral | Target: ₹850
CITI maintained a Neutral rating on AU Small Bank, citing a weak NIM profile and elevated credit costs as key concerns. The net interest margin (NIM) dropped by 38 basis points to 5.4%, while credit cost rose to 1.97%, leading to a core earnings miss, even though the bank received treasury support worth ₹3 billion and implemented tight cost controls.
Key takeaways from CITI:
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Slippages rose to 3.8%, led by stress in MFI, credit card, and mortgage segments.
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Loan yields plunged 27bps QoQ, while investment yields also dropped by 20–25bps.
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Excess liquidity created a further 10bps drag on NII, which came in 5% below Citi’s estimate.
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The bank raised credit cost guidance by 10–15bps, signaling continued near-term asset quality pressure.
Nuvama – Reduce | Target: ₹650
Nuvama downgraded AU Small Finance Bank to Reduce, sharply lowering its target price to ₹650 due to multiple headwinds in Q1FY26. The brokerage flagged that NIM fell more than expected, and delinquencies were higher, especially in south-based mortgage loans and credit card portfolios.
Highlights from Nuvama’s view:
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NIM decline of 28bps, versus its estimate of a 25bps drop.
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Credit cost on credit cards remained elevated despite a downsized portfolio.
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Core PPOP declined 15% QoQ, though it rose 8% YoY.
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The bank, which had earlier cut its credit cost guidance to 85bps in Q4FY25, has now revised it up to 1%, citing worsening conditions in key retail segments.
Brokerage Summary:
| Brokerage | Rating | Target Price | View |
|---|---|---|---|
| CITI | Neutral | ₹850 | Maintain with caution |
| Nuvama | Reduce | ₹650 | Downgrade due to stress |
Both brokerages agree that AU Small Finance Bank’s Q1FY26 performance was underwhelming, with NIM compression and rising credit stress being the central concerns. While CITI believes the challenges are already priced in and maintains a neutral stance, Nuvama has turned more bearish, citing the possibility of extended pain in MFI and unsecured segments.
Disclaimer: This summary is based on brokerage reports and is not investment advice. Please consult a financial advisor before making any investment decisions.
