Morgan Stanley retained its overweight rating on AU Small Finance Bank, reducing the target price to Rs 685, citing near-term headwinds in the unsecured lending portfolio. The bank’s management lowered loan growth guidance to 20% from the earlier 25% and revised credit cost estimates to 1.5-1.6% from the earlier 1.3-1.4% due to stress in the microfinance and unsecured credit card segments.
The bank’s Q3 FY25 performance highlighted these challenges, with net profit declining 7.5% quarter-on-quarter (QoQ) to Rs 528.4 crore from Rs 571.2 crore in Q2 FY25. Net interest income (NII) grew modestly by 2.4% QoQ to Rs 2,022.5 crore from Rs 1,974.4 crore, impacted by adverse asset mix and interest reversals. Gross NPA rose to 2.31% from 1.98% QoQ, while net NPA increased to 0.91% from 0.75%.
Despite the asset quality issues, Morgan Stanley noted the bank maintained its return on assets (RoA) guidance, aided by cost control measures. However, the brokerage reduced FY26/FY27 EPS estimates by 11% and 5%, respectively, reflecting the elevated credit costs and slower loan growth outlook.
