AU SFB Shares Plunge 9% After Q2 Results; Brokerages Differ on Outlook

AU Small Finance Bank’s Growth Story Meets a Valuation Test

A sharp share-price decline after strong earnings puts asset quality, margins and valuation under closer scrutiny.

Strong earnings did not settle investor concerns

AU Small Finance Bank’s September-quarter results showed broad growth. Profit after tax rose 53 per cent year on year to ₹858 crore, while net interest income increased 32 per cent to ₹2,820 crore. Net interest margin improved 33 basis points year on year to 5.8 per cent. The bank reported annualised return on assets of 1.7 per cent and return on equity of 16.1 per cent.

The market response was sharply negative: AU SFB shares fell as much as 9.45 per cent intraday to ₹845.65 on the BSE, before trading 5.70 per cent lower at ₹880.75 at 9.53 AM. The divergence between earnings growth and the share-price reaction suggests that investors were looking beyond headline profit and focusing on the quality and durability of future returns.

Slippages and funding costs are key watchpoints

Gross and net slippages increased 24 basis points and 18 basis points sequentially, respectively, which the report linked to seasonal tractor billing. Both measures were nevertheless lower year on year, by 70 basis points and 42 basis points. Credit costs were 73–74 basis points in the first half, below the bank’s approximately 90-basis-point guidance for FY27. The unsecured portfolio was described as stable, with collection efficiency at 99 per cent.

Those figures offer some reassurance, but the sequential rise in slippages remains relevant because it can affect provisions and profitability if it persists. Management reiterated a cross-cycle credit-cost expectation of 90–100 basis points and said it remained watchful for emerging stress. Investors will therefore be assessing whether the latest movement is seasonal or signals a broader change in repayment trends.

Deposits grew 28.6 per cent year on year to ₹1,70,460 crore, nearly 1.6 times system growth. CASA deposits reached ₹50,289 crore, up 29 per cent. But management expects limited further reduction in cost of funds amid tight liquidity, leaving margins broadly rangebound. That constraint could limit how much deposit growth translates into improved lending spreads.

Brokerages disagree on the room for upside

Emkay said profit missed its estimate by 2 per cent, as higher operating expenses—including branch expansion and more than 100 asset centres—were partly offset by provisions that were 10 per cent below its expectations. It expects return on assets to improve to 1.7–1.8 per cent over FY27–29E from 1.5 per cent in FY26, but retained a REDUCE rating and an unchanged ₹950 target price. Its concern is that the bank’s valuation of 2.5 times September 2028 estimated adjusted book value leaves limited margin of safety amid macroeconomic uncertainty.

JM Financial maintained a BUY rating, though it cut its target price to ₹1,110 from ₹1,165. It highlighted the bank’s growth and credit costs within guidance, while identifying the margin trajectory in a rising-rate environment and reliance on insurance income as risks to monitor. Insurance income accounted for 14 per cent of profit before tax, compared with about 5 per cent for the brokerage’s bank coverage. JM Financial forecasts average return on assets of 1.7 per cent and return on equity of 17 per cent over FY27–29E.

Key Highlights

• Profit after tax rose 53 per cent year on year to ₹858 crore; net interest income grew 32 per cent to ₹2,820 crore.
• Shares fell as much as 9.45 per cent intraday despite the earnings growth.
• Sequential slippages increased, although both gross and net measures improved year on year.
• Deposit growth was strong, but management sees limited scope for further cost-of-funds relief.
• Emkay retained REDUCE, while JM Financial maintained BUY with a lower target price.

Investor Note: The contrasting brokerage views underline the importance of tracking asset quality, funding costs and valuation alongside headline growth. Investors should treat the stated targets as analyst opinions, not assured outcomes, and consider their own risk tolerance before making decisions.