Motilal Oswal Financial Services

5 July 2020

Annual Report Update | Sector: Financials

AU Small Finance Bank

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Buy

Focus remains on building a sustainable retail franchise

Digitalization to improve cost ratios; PCR improves sharply



CMP: INR567

TP: INR675 (+19%)



Stock Info

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

12M Avg Val (INR M)

Free float (%)

AUBANK IN

304

173.6 / 2.4

1218 / 366

20/-16/-9

525

69.1

AUBANK’s Annual Report emphasizes the bank’s core focus on building a strong

retail franchise, with retail AUM comprising ~84% of the loan book (98% secured

loans). On the liability side, CASA plus retail TD comprises ~43% of deposits, with

the concentration of the top 20 deposits declining to 23.4% v/s 25% in FY20.

For FY20, NII/PPoP grew by 42%/66% while PAT grew by 77% YoY to INR6.7b

aided by Aavas stake sale with bank reporting strong RoA/RoE of 1.8%/18%.

Capital level remains strong with a Tier 1 ratio of 18.4% (CAR at 22%).

Focused lending toward income generation activities and a lower average ticket

size of ~INR0.5m has helped the bank maintain control over credit cost despite

facing various headwinds. Retail GNPA improved to 1.7% v/s 2.2% in FY19, and

overall GNPA increased to 1.7% v/s 2.0% in FY19. AUBANK follows an accelerated

provisioning policy, which has enabled the bank to substantially increase its PCR

by ~1,520bp to 53%.

The bank continues to invest in digital capabilities and offers multiple new-age

products that are gaining strong traction. Continuous scale-up in the digital channel

would enable the bank to achieve higher productivity, thereby improving cost ratios.

AUBANK reported a stable operating performance in FY20, with deposit growth

holding strong despite an increasing focus on retail deposits. Collection efficiency

remains the key to assessing the overall impact of moratorium, which would keep

asset quality under watch. We estimate growth to remain modest, while credit cost

would likely remain elevated (estimate of 1.7% for FY21E, in addition to 52bp of

COVID-19 provisions made in 4QFY20). Maintain Buy, with unchanged TP of INR675.

Retail franchise growing well; Used Vehicle segment to drive growth



Financials Snapshot (INR b)

Y/E March

FY20

FY21E

NII

19.1

22.8

PPoP

12.0

13.7

PAT

6.7

6.6

NIM (%)

5.1

5.0

EPS (INR)

22.6

21.7

EPS Gr. (%)

71.3

-4.3

BV/Sh. (INR)

142.2

163.9

ABV/Sh. (INR)

138.9

155.7

Ratios

RoE (%)

18.0

14.2

RoA (%)

1.8

1.4

Valuations

P/E(X)

25.0

26.2

P/BV (X)

4.0

3.5

P/ABV (X)

4.1

3.6

FY22E

28.4

17.5

9.2

5.1

30.3

40.1

194.2

185.5

16.9

1.7

18.7

2.9

3.1



AUBANK continues to strengthen its asset book, with retail comprising ~84%

of total AUM (98% secured). Focused lending toward income generation

activities and a lower average ticket size of ~INR0.5m have enabled the bank

to build a granular loan book. New product offerings and geographical

expansions would continue to aid expansion in retail assets, while the

bank’s mantra –

Retail is all about detail –

would help maintain strong

control on credit cost.

As the New Vehicle segment continues to face headwinds, the bank has

ramped-up the

mix of used vehicle financing (including cash-on-wheels) to

~37% v/s 28% in FY19. AUBANK financed ~6% of the total used vehicles sold

in FY20, driving overall improvement in IRR.

At the system level, the Used

Car market has crossed the 4m unit mark, 1.2x that of the New Car market.

Furthermore, the Used Car segment is expected to grow faster and shift more

toward organized players (share increased to 18% v/s 10% in FY11). We thus

expect the bank to continue to show strong traction in this business.

Geographical mix improving; disbursement outside Rajasthan forms ~60%

AUBANK continues to witness strong traction in

retail disbursements outside

Rajasthan, which grew ~26% YoY and formed ~60% of the total disbursements in

FY20.

This resulted in an improved geographical mix, with the

share of the top

four states declining to 82% v/s 87% in FY19.

The share of Rajasthan declined to

43% v/s 46% in FY18, while the deposit mix also remains well-diversified. 61% of

AU’s branches are in rural/semi-urban areas and remain a key focus area.

Research Analyst: Nitin Aggarwal

(Nitin.Aggarwal@MotilalOswal.com); |

Himanshu Taluja

(Himanshu.Taluja@motilaloswal.com)

Alpesh Mehta

(Alpesh.Mehta@MotilalOswal.com);

Yash Agarwal

(Yash.Agarwal@motilaloswal.com)

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

AU Small Finance Bank

Shareholding pattern (%)

As On

Mar-20 Dec-19 Mar-19

Promoter

31.0

32.2

DII

15.4

15.5

14.4

FII

28.7

26.8

23.8

Others

24.9

26.7

29.6

FII Includes depository receipts

Stock Performance (1-year)

Building strong/granular liability franchise; TD customers grow by ~93%

AUBANK has stepped up efforts in building a strong liability franchise, with an

enhanced focus on growing its retail term deposits and CASA, which form 43% of the

total deposits v/s 38% in FY19. AUBANK was relatively less impacted in the recent

withdrawal of deposits witnessed by certain small and mid-sized banks, indicating

higher stickiness.

The bank launched AU Royale – a premium savings account

targeting high-value customers,

and acquired ~4.7k new-to-bank customers and

upgraded ~11k customers with an ATS of INR1m.

Overall, the bank saw an increase

of 48% in its deposit customers with the addition of ~493k accounts.

On the other

hand, TD customers grew 93% YoY to ~209k accounts v/s ~108k accounts in FY19.

Strong asset quality | Aggressive provisioning policy | PCR improves sharply

A higher proportion of the secured book, coupled with strong underwriting and

efficient collection management, has enabled the bank to report stable asset quality

despite various headwinds. The GNPA ratio declined to 1.7% (2.0% in FY19), led by

improvement in retail GNPA to 1.7% v/s 2.2% in FY19. Overall, ~25% of the book is

under moratorium, while SMA a/c where moratorium was extended stood at

INR24.7b (excluding INR3b on the securitized portfolio).

The bank follows an

accelerated provisioning policy and sharply increased its PCR by ~1,520bp to 52.4%

from 37.4% in FY19.

AUBANK has only one NPA (INR64m) in the NBFC book; along

with a lower proportion of non-investment grade (~4%) book, this provides further

comfort. The bank further carries a standard assets provision of INR1.2b and a

COVID-19 related provision of INR1.4b.

Increased focus on cross-selling; Digitalization to help control cost

AUBANK has reached a customer base of 1.7m and is trying to gain on customer

wallet share via higher cross-selling.

AUBANK’s average product per customer

stands at 1.3x v/s an average 4x for large private banks, which provides substantial

room for growth via cross-selling.

The bank is investing in building digital

capabilities and providing a superior experience to customers. AUBANK has ~0.2m

Internet and mobile banking users transacting ~6.3k transactions per day (+167%

YoY). The bank has opened a total of ~0.3m SA a/c through tablet devices

comprising ~93% of the total SA accounts opened in FY20, taking the total SA

accounts to ~1.2m.

RWA density best among peers; concentration ratios improve further

AUBANK has reported an improvement in concentration ratios, with the

concentration of the top 20 advances/exposures improving by 193bp/28bp to

3.8%/8.1%. On the liability side, the concentration of the top 20 depositors

improved by 160bp to 23.4%. Furthermore, the bank is focused on improving the

quality of its loan book; this is reflected in its RWA density, which has improved

~940bp over the past two years to 53% currently. The bank has built a granular book

with ~60% of loans <INR0.25m.

Valuation and view

AUBANK reported a steady operating performance for FY20, even as COVID-19

provisions dented earnings. Although asset quality remains stable, trends in

collection efficiency remain key to assessing the overall impact of moratorium,

which would keep asset quality under watch. Deposit growth, however, has held

strong, enabling the bank to maintain strong surplus liquidity. We estimate loan

growth trends to remain soft at 15% in FY21, while credit cost could increase to

1.7% in FY21E (in addition to 52bp of COVID-19 provisions made in 4QFY20) as we

build-in higher slippages. Maintain Buy, with TP of INR675 (3.5x FY22E BV).

5 July 2020

AU Small Finance Bank

Other takeaways from the Annual Report

Parameters



ESOP



Management change

Penalty



Remuneration for

FY20



PSLC



Fraud



Reward points

Change in discount

rate

Return on plan

assets

Contingent liability



Bancassurance fees



Sensitive sector

exposure



Key highlights

~2,300 employees have been granted ESOPs as of FY20, representing ~13% of the total employees.

The number of employees with ESOPs formed ~27%/21% of o/s employees as of FY17/FY18.

The bank granted ~2.7m ESOPs in FY20, the highest in the past three years. Options exercised stood at 1.7m.

With effect from 1 Apr'20:

Mr Vimal Jain was appointed Chief Financial Officer (CFO).

Mr Deepak Jain was appointed Chief Operating Officer (COO).

In FY20, the RBI imposed a penalty of INR10k for not exchanging soiled notes at a branch.

The ratio of remuneration of the MD & CEO to median employees’ remuneration stood at 92x, while that for

WTDs stood at 83x.

The MD & CEO received a total remuneration of INR23.1m and the WTDs received INR34.3m in FY20.

Non-managerial staff witnessed an average percentile decrease of ~1.3% for FY20 while managerial staff

saw an average percentile decrease of ~5.8%.

The percentage increase in median remuneration was almost negligible at 0.001%.

A total of 33 employees earned salaries in excess of INR10m in FY20.

The bank achieved an average PSL target of 85% for FY20 v/s the requirement of 75%.

The bank saw a sharp increase in PSLC sales in FY20; it sold PSLCs worth INR155b v/s INR53b in FY19.

The bank did not purchase any PSLC in FY20 v/s INR75b in FY19.

The total number of fraud accounts reported during the year increased to 95, with an amount of INR11m, v/s

33 in FY19.

Of this, ~INR8m remained post net of recoveries/write-offs, for which the bank has created 100% provisions.

The bank does not provide any reward points on its cards at the moment.

The discount rate considered for employee benefits declined sharply to 6% in FY20 from 8% in FY19

The expected return on plan assets has been considered at 8%, much higher than the discount rate.

Contingent liabilities grew ~2.7x in FY20, led by an increase in guarantees given by the bank.

This, as a proportion of total assets, almost doubled to ~3.5% v/s 2% in FY19.

Bancassurance fee grew ~17% YoY to INR310m for FY20 v/s INR266m in FY19.

Fees were primarily driven by the sale of non-life insurance policies, which grew 32% YoY to INR130m.

Bancassurance fee comprises ~7% of the total fee income.

AUBANK’s exposure toward real estate grew 66%% YoY to INR23.8b.

Capital markets exposure grew to INR2.25b v/s INR1.13b in FY19.

Commercial real estate exposure stood at INR9b v/s INR7.9b in FY19, forming 3.3% of the total loans.

Banks disbursements for FY20 under various schemes:

MUDRA loans stand at INR28.6b.

PMEGP stands at INR190m.

CTGMSE stands at INR640m.

PMAY-CLSS stands at INR230m.

~INR41b of deposits were collected from the rural and semi-urban areas.

~60% of the loans are of a ticket size less than INR2.5m.

Source: MOSL, Company

Financial inclusion



5 July 2020

AU Small Finance Bank

Exhibit 1: SFBs are gaining market share with a loan/deposit

market share of 0.9%/0.5% as of FY20...

FY19

FY20

2.8%

Exhibit 2: …within which the share of the top 3 SFBs

increased to 64% in FY19 v/s 53% in FY16

Top 3 SFB's

53.0%

Other 7 SFB's

64.0%

1.5%

47.0%

36.0%

0.3%

0.5%

0.6%

0.9%

Source: MOFSL, Company

Exhibit 3: Retail comprises 84% of the total book v/s 78% in

FY19…

Retail

Wholesale

Money Market

Exhibit 4: …within which Wheels forms ~50%, while SBL-

MSME forms ~44%

Wheels

10 8

Sec. MSME

Others

6 10

8 7 9 1

2 4

5 6 6

34 35 35 36 38 42 41 42 42 42 43 43 44

59 59 61 56 57 57 57 54

56 56 54 54 52 51 50

Source: MOFSL, Company

Exhibit 5: Wheels book split as of FY19: Focus remains on

the Used Vehicle segment

28%

New

Exhibit 6: Wheels book split as of FY20: Company expanding

share to 37% v/s 28% in FY19

New

37%

Used (Inc Cash

on wheels)

62%

Trade Advances

Used (Inc Cash

on wheels)

70%

Trade Advances

Source: MOFSL, Company

Exhibit 7: New vehicle sales have witnessed sharp moderation in FY20

New Vehicles Market (Units in m)

All vehicles

All vehicles (Ex 2W)

FY15

19.7

3.7

2.6

0.6

0.5

FY16

20.5

4.0

2.8

0.7

0.5

FY17

21.9

4.3

3.0

0.7

0.5

FY18

FY19

FY20

25.0

26.3

21.5

4.8

5.1

4.1

3.3

3.4

2.8

0.9

1.0

0.7

0.6

0.7

0.6

Source: Company, MOFSL

5 July 2020

AU Small Finance Bank

Used Car market is

estimated at ~4mn units

(1.2x of New Car market)

Exhibit 8: AUBANK financed ~6% of the total used vehicles sold at the system level

FY20 (Units in m)

New vehicles sold

Used vehicles sold

2W sales

For System

21.5

17.4

For AUBANK % share of AUBANK

0.29

0.25

0.04

1.3%

6.3%

0.2%

Source: Company, MOFSL

Exhibit 9: Pre-owned car market in FY11: Share of organized

players in the pre-owned car market has been increasing

Exhibit 10: Pre-owned car market in FY19: Increased share

implies greater opportunities for banks to continue showing

traction

10.0%

C2C

20.0%

40.0%

18.0%

32.0%

C2C

Unorganized

Semi-organized

Organized

34.0%

16.0%

Unorganized

Semi-organized

Organized

30.0%

Source: MOFSL, Company

Exhibit 11: Retail AUM split FY18: The share of Rajasthan

has been declining

3% 1%

Rajasthan

Maharashtra

Madhya Pradesh

Gujarat

46%

Delhi

Punjab

CG+Haryana+HP+Goa

12%

Other states

Source: MOFSL, Company

Exhibit 12: Retail AUM split FY20: While, the share of other

states is gaining market share, signifying diversification

11%

43%

Rajasthan

Maharashtra

Madhya Pradesh

Gujarat

Delhi

Punjab

14%

17%

11%

CG+Haryana+HP+Goa

Other states

Source: MOFSL, Company

Exhibit 13: Deposit split 2QFY19: The share of Rajasthan has

been declining

Rajasthan

15%

27%

Maharashtra

Himachal Pradesh

Madhya Pradesh

21%

Gujarat

Delhi

Punjab

Other states

Source: MOFSL, Company

Exhibit 14: Deposit split FY20: While, other states are

gaining share, signifying geographical expansion

Rajasthan

11%

24%

Maharashtra

Himachal Pradesh

Madhya Pradesh

Gujarat

Delhi

36%

Punjab

Other states

Source: MOFSL, Company

5 July 2020

AU Small Finance Bank

Proportion of disbursement

has been higher outside

Rajasthan at 60%, implying

growth from diversified

states

Exhibit 15: Disbursements outside Rajasthan stand strong, aiding geographical

diversification

INR b

Rajasthan Disbursements

Outside Rajasthan Disbursements

Total retail disbursements

FY19

46.95

71.05

118.0

FY20

60.63

89.76

150.4

YoY (%)

29.1%

26.3%

27.4%

% Share

40%

60%

100%

Source: Company, MOFSL

~33% of the branches are in

the rural areas, while

another ~28% in semi-

urban, which highlights the

bank’s focus on financial

inclusion

Exhibit 16: Geographical distribution of branches

15%

33%

24%

Rural

Semi-urban

Urban

Metropolitan

28%

Source: Company, MOFSL

Exhibit 17: Liability profile: Proportion of deposits is increasing

NCDs

Refinance

CPs

Loans-Banks & NBFC

Deposits

Others

Source: Company, MOFSL

Exhibit 18: Total number of CA / term deposit customers

grew by 65%/93% in FY20…

FY18

FY19

FY20

208,776

Exhibit 19: …while the total number of SA / total deposit

customers have grown by 43%/48% in FY20

FY18

FY19

FY20

107,912

78,907

22,838

47,783

58,020

CA Accounts

TD Accounts

Source: MOFSL, Company

SA Accounts

Total Accounts

Source: MOFSL, Company

5 July 2020

AU Small Finance Bank

Increasing granularization,

with CASA+ Retail TD

forming 43% of the total

deposits

Exhibit 20: Increasing proportion of retail deposits at a time when garnering deposits has

been a challenge

CASA Ratio

CASA + Retail TD

43.0%

41.8%

39.9%

37.9%

40.6%

21%

4QFY19

19%

1QFY20

16%

2QFY20

17%

3QFY20

16%

4QFY20

Source: Company, MOFSL

Exhibit 21: Concentration ratios are improving, with the top

20 advances/deposits declining 190bp/160bp

Top 20 Adv (%)

40.9

Top 20 Exp (%)

Top 20 Dep (%)

Exhibit 22: RWA density is showing continuous

improvement; improved by ~940bp over past two years

RWA / Total assets (%)

25.0

9.7

8.3

5.7

23.4

8.1

3.8

Source: MOFSL, Company

Exhibit 23: Asset quality is showing stable/improving trends

despite various headwinds…

GNPA (%)

3.0 3.1 2.8

2.2 2.0 2.1 2.0 2.1 2.0

2.1 2.1

1.9 1.7

1.92.0

1.4 1.3 1.3 1.3 1.3

1.3

1.1 1.0

0.8

NNPA (%)

Exhibit 24: …while PCR increased sharply by ~1520bp to

~53% in FY20 as the bank follows an accelerated

provisioning policy

PCR (%)

52.5

37.2

37.4

40.5

43.9

46.8

Source: MOFSL, Company

5 July 2020

AU Small Finance Bank

Exhibit 25: Concentration of top 4 NPA accounts increased

marginally to 5.9% in FY10

Top 4 NPA Acc (INRm)

12.1%

6.8%

2.5%

3.3%

150

183

263

270

% of total GNPA

Exhibit 26: Follows aggressive provisioning policy over

regulatory requirements across buckets

Overdue buckets

0-90

% of provision as per bank policy

Secured

Unsecured

SME & Agri: 0.25%, CRE: 1% and others

at 0.40%

15%

25%

30%

60%

100%

Source: MOFSL, Company

5.6%

5.9%

91-180

181-364

365-455

456-729

>729

Loss asset

Source: MOFSL, Company

Exhibit 27: Split of wholesale AUM book

NBFC

RE Group

Business Banking

Agri SME

Exhibit 28: Rating profile of NBFC book

1.9%

7.9%

3.8%

39.8%

BBB

Non Investment

Grade

46.6%

Unrated

Source: MOFSL, Company

Exhibit 29: Increasing no of digital transactions (Internet and

mobile banking); grew 167% YoY, with ~6.3k transactions

per day…

No of transactions (in mn)

Avg transactions per day

8,883

3,366

4,299 5,061

7,275

Exhibit 30: …while the value of digital transactions is also

showing strong traction; slightly impacted in 4QFY20 due to

lockdown

Value of transactions (INRb)

Avg value of transactions per day (INRm)

420 400

240

170 210

100 130

1,634 2,022

542 1,325

165

2,523

Source: MOFSL, Company

5 July 2020

AU Small Finance Bank

Exhibit 31: Tab-based a/c openings continue to see strong

traction; ~93% of a/c opened through tab v/s 80% in FY19

SA a/c opened through Tab (In 000)

% of total SA a/c opened

90%

87%

86% 87% 91% 87% 98% 91% 96%

78% 84%

Exhibit 32: Paperless disbursements are showing significant

improvement (INR m)

1QFY20

2QFY20

3QFY20

4QFY20

690

740

460

230

180

100

350

140

80 110

150

450

Source: MOFSL, Company

Valuation and view



AUBANK is focused on scaling up its key business lines of Vehicle/MSME Loans.

It further aims to expand the new segments of Housing Loan, Gold Loan,

Consumer Durable Financing, and so on. However, we expect loan growth to be

impacted by the COVID-19 crisis, potentially driving a slowdown in

consumption-linked loans; thus, loan growth trends are expected to remain

softer, growing just 15% in FY21.

AUBANK has shown strong progress in building a granular liability franchise,

with the proportion of deposits to overall funding improving to 72%. The

proportion of retail SA/TD rose to 86%/39% and is expected to grow further as

customer vintage increases.

The impact of COVID-19 would have a severe impact across multiple segments

due to the contagion effect. We expect a potential increase in delinquencies in

the Wheels/MSME portfolio. AUBANK disclosed moratorium has been availed

for 25% of the loan book, and the SMA book stands at INR23b (8.5% of the loan

book) as of Apr’20, which would keep asset quality under watch.

Buy, with TP of INR675:

AUBANK reported a steady operating performance for

FY20, even as COVID-19 provisions dented earnings. Although asset quality

remains stable, trends in collection efficiency remain key to assessing the overall

impact of moratorium, which would keep asset quality under watch. Deposit

growth, however, has held strong, enabling the bank to maintain strong surplus

liquidity. We estimate loan growth trends to remain soft at 15% in FY21; credit

cost could increase to 1.7% in FY21E (in addition to 52bp of COVID-19 provisions

made in 4QFY20) as we build in higher slippages.

Maintain Buy,

with TP of

INR675 (3.5x FY22E BV).

5 July 2020

AU Small Finance Bank

Exhibit 33: DuPont Analysis: We estimate return ratios to remain modest in the near term

Y/E March

Interest Income

Interest Expense

Net Interest Income

Core Fee and Sec. Income

Non-Interest income

Total Income

Operating Expenses

Employee cost

Others

Operating Profits

Core operating Profits

Provisions

NPA

Others

PBT

Tax

RoA

Leverage (x)

RoE

FY15

20.13

8.06

12.07

0.06

0.07

12.13

4.44

2.70

1.74

7.69

7.68

1.73

0.26

1.47

5.96

1.95

4.01

4.97

19.91

FY16

19.56

7.65

11.91

0.07

0.10

12.01

4.91

3.05

1.86

7.10

7.07

0.85

-0.04

0.89

6.25

2.15

4.10

5.7

23.3

FY17

15.92

6.17

9.75

1.67

11.42

4.39

2.40

1.99

7.03

1.29

0.21

1.09

5.74

3.92

4.15

5.4

22.2

FY18

12.35

5.78

6.57

2.45

2.71

9.29

5.26

2.97

2.29

4.03

3.76

0.93

0.39

0.53

3.10

1.06

2.04

6.7

13.7

FY19

11.46

6.24

5.22

1.71

1.80

7.01

4.21

2.34

1.87

2.81

2.72

0.55

0.29

0.26

2.25

0.77

1.48

9.5

14.0

FY20

11.46

6.36

5.11

1.63

1.89

7.00

3.79

2.03

1.76

3.20

2.95

0.76

0.00

2.44

0.64

1.81

10.0

18.0

FY21E

11.33

6.38

4.96

1.51

1.77

6.72

3.74

2.07

1.67

2.98

2.73

1.07

1.04

0.03

1.92

0.48

1.43

9.9

14.2

FY22E

11.32

6.18

5.13

1.49

1.81

6.94

3.78

2.06

1.72

3.16

2.84

0.93

0.88

0.04

2.23

0.56

1.67

10.1

16.9

5 July 2020

AU Small Finance Bank

Financials and valuations

Income Statement

Y/E MARCH

Interest Income

Interest Expense

Net Interest income

Growth (%)

Other Income

Total Income

Growth (%)

Operating Expenses

Growth (%)

Operating Profits

Growth (%)

Core Operating Profits

Growth (%)

Total Provisions

PBT

Tax

Tax Rate (%)

PAT

Growth (%)

Adj. PAT

Growth (%)

Balance Sheet

Y/E MARCH

Equity Share Capital

Reserves & Surplus

Equity Net worth

Deposits

Growth (%)

Borrowings

Other liabilities

Total Liabilities

Current Assets

Investments

Growth (%)

Loans

Growth (%)

Net Fixed Assets

Other assets

Total Assets

Total Assets (incl. off BS)

Asset Quality

GNPA

NNPA

GNPA Ratio

NNPA Ratio

Slippage Ratio

Credit Cost

PCR (Exc. Tech. write off)

FY15

7,039

2,820

4,219

52.7

4,243

50.4

1,554

37.0

2,690

59.4

2,687

62.7

606

2,084

681

32.7

1,402

97.7

FY16

10,105

3,953

6,152

45.8

6,202

46.2

2,538

63.3

3,665

36.2

3,650

35.8

438

3,226

1,110

34.4

2,116

50.9

2,116

50.9

FY17

12,800

4,963

7,837

27.4

8,100

15,937

156.9

3,528

39.0

12,408

238.6

5,650

54.8

1,039

11,369

3,149

27.7

8,220

288.4

3,334

57.5

FY18

17,672

8,267

9,405

20.0

3,881

13,285

-16.6

7,526

113.3

5,759

-53.6

5,377

-4.8

1,326

4,433

1,513

34.1

2,920

-64.5

2,920

-12.4

FY19

29,488

16,064

13,425

42.7

4,620

18,045

35.8

10,826

43.8

7,219

25.3

6,998

30.1

1,418

5,801

1,983

34.2

3,818

30.7

3,818

30.7

FY20

42,859

23,769

19,089

42.2

7,061

26,150

44.9

14,179

31.0

11,972

65.8

11,018

57.4

2,832

9,140

2,392

23.9

6,748

76.7

5,962

56.2

FY21E

52,094

29,309

22,785

19.4

8,120

30,905

18.2

17,189

21.2

13,716

14.6

3,473

-68.5

4,909

8,808

2,220

25.2

6,588

-2.4

6,588

10.5

(INR m)

FY22E

62,501

34,147

28,354

24.4

9,988

38,342

24.1

20,889

21.5

17,453

27.2

3,436

-1.1

5,115

12,338

3,109

25.2

9,229

40.1

9,229

40.1

FY15

441

7,667

8,108

28,783

3,462

40,353

2,029

1,398

23.1

34,040

38.6

194

2,691

40,353

61,990

FY15

327

155

1.0

0.5

1.1

2.0

52.5

FY16

441

9,654

10,094

47,826

5,022

62,942

1,234

2,316

65.6

56,208

65.1

246

2,938

62,942

88,947

FY16

741

592

1.3

1.1

0.8

20.1

FY17

2,843

17,033

19,876

71,199

6,737

97,812

6,250

21,503

828.6

65,509

16.5

2,758

1,792

97,812

137,692

FY17

1,245

805

1.9

1.2

1.7

1.5

35.4

FY18

2,857

19,955

22,812

79,233

76,389

9,894

188,328

17,612

30,506

41.9

133,121

103.2

3,861

3,227

188,328

215,586

FY18

2,697

1,693

2.0

1.3

2.1

1.0

37.2

FY19

2,924

28,705

31,629

194,224

145%

86,134

14,241

326,228

17,402

71,617

134.8

228,187

71.4

4,470

4,552

326,228

340,501

FY19

4,701

2,945

2.1

1.3

2.5

0.6

37.4

FY20

3,041

40,206

43,247

261,639

35%

103,353

12,670

421,431

33,697

106,682

49.0

269,924

18.3

4,480

6,648

421,431

460,437

FY20

4,578

2,173

1.7

0.8

2.0

1.1

52.5

FY21E

3,041

46,794

49,835

319,200

22.0%

113,050

15,204

497,811

39,447

131,219

23.0

310,359

15.0

4,928

11,857

497,811

556,927

FY21E

9,697

4,304

3.1

1.4

3.5

1.7

55.6

FY22E

3,041

56,022

59,064

399,000

25.0%

130,008

18,245

606,838

46,613

157,463

20.0

387,392

24.8

5,421

9,949

606,838

680,626

FY22E

12,058

4,509

3.1

1.2

2.4

1.4

62.6

5 July 2020

AU Small Finance Bank

Financials and valuations

Ratios

Y/E MARCH

Yield and Cost Ratios (%)

Avg. Yield - on IEA

Avg. Yield on loans

Avg. Cost of funds

NIM (On total assets)

NIM (On IEA)

Capitalization Ratios (%)

CAR

Tier I

Tier II

Business and Efficiency Ratios (%)

Loan/Deposit Ratio

CASA Ratio

Cost/Assets

Cost/Total Income

Cost/Core Income

Int. Expense/Int. Income

Fee Income/Total Income

Non Int. Income/Total Income

Investment/Deposit Ratio

Emp. Cost/Total Expense

Profitability and Valuations

RoE

RoA (On bal. Sheet)

RoRWA

Book Value (INR)

Growth (%)

Price-BV (x)

Adjusted BV (INR)

Growth (%)

Price-ABV (x)

EPS (INR)

Growth (%)

Price-Earnings (x)

FY15

23.0

13.7

11.3

12.1

13.8

FY15

17.3

15.8

1.5

FY15

4.4

36.6

40.1

0.3

0.6

60.8

FY15

19.9

4.0

3.4

183.9

32.2

162.2

31.0

32.2

89.5

FY16

21.5

14.5

10.3

11.9

13.1

FY16

16.9

13.5

3.4

FY16

4.9

40.9

41.0

39.1

0.3

0.8

62.2

FY16

23.3

4.1

3.2

229.0

24.5

184.4

13.7

48.0

49.0

FY17

16.9

10.5

8.3

9.8

10.3

FY17

23.1

21.5

1.6

FY17

4.4

22.1

38.4

38.8

8.4

50.8

54.6

FY17

22.2

4.1

9.7

69.9

-69.5

68.2

-63.0

50.1

4.3

FY18

13.1

9.4

7.3

6.6

7.0

FY18

19.3

18.4

0.9

FY18

168.0

26.9

5.3

56.7

58.3

46.8

26.3

29.2

38.5

56.5

FY18

13.7

2.04

2.5

79.8

14.2

7.1

76.3

12.0

7.4

10.2

-79.5

55.3

FY19

12.1

11.7

7.4

5.2

5.5

FY19

19.3

16.0

3.4

FY19

117.5

18.5

4.2

60.0

60.7

54.5

24.4

25.6

36.9

55.5

FY19

14.0

1.48

2.0

108.2

35.5

5.2

102.6

34.5

5.5

13.2

28.9

42.9

FY20

12.1

12.4

7.4

5.1

5.4

FY20

22.0

18.4

3.6

FY20

103.2

14.5

3.8

54.2

56.3

55.5

23.4

27.0

40.8

53.6

FY20

18.0

1.81

3.0

142.2

31.4

4.0

138.9

35.4

4.1

22.6

71.3

25.0

FY21E

12.0

12.1

7.4

5.0

5.2

FY21E

20.8

17.7

3.1

FY21E

97.2

16.6

3.7

55.6

57.8

56.3

22.5

26.3

41.1

55.2

FY21E

14.2

1.4

2.4

163.9

15.2

3.5

155.7

12.1

3.6

21.7

-4.3

26.2

FY22E

11.9

7.1

5.1

5.4

FY22E

19.3

17.1

2.2

FY22E

97.1

18.4

3.8

54.5

57.1

54.6

21.4

26.0

39.5

54.5

FY22E

16.9

1.7

2.8

194.2

18.5

2.9

185.5

19.2

3.1

30.3

40.1

18.7

5 July 2020

AU Small Finance Bank

Explanation of Investment Rating

Investment Rating

Expected return (over 12-month)

BUY

>=15%

SELL

< - 10%

NEUTRAL

< - 10 % to 15%

UNDER REVIEW

Rating may undergo a change

NOT RATED

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within

following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.

Disclosures

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).

Motilal Oswal Financial Services Ltd. (MOFSL) is a SEBI Registered Research Analyst having registration no. INH000000412. MOFSL, the Research Entity (RE) as defined in the

Regulations, is engaged in the business of providing Stock broking services, Investment Advisory Services, Depository participant services & distribution of various financial

products. MOFSL is a subsidiary company of Passionate Investment Management Pvt. Ltd.. (PIMPL). MOFSL is a listed public company, the details in respect of which are

available on www.motilaloswal.com. MOFSL (erstwhile Motilal Oswal Securities Limited - MOSL) is registered with the Securities & Exchange Board of India (SEBI) and is a

registered Trading Member with National Stock Exchange of India Ltd. (NSE) and Bombay Stock Exchange Limited (BSE), Multi Commodity Exchange of India Limited (MCX) and

National Commodity & Derivatives Exchange Limited (NCDEX) for its stock broking activities & is Depository participant with Central Depository Services Limited (CDSL) National

Securities Depository Limited (NSDL),NERL, COMRIS and CCRL and is member of Association of Mutual Funds of India (AMFI) for distribution of financial products and Insurance

Regulatory & Development Authority of India (IRDA) as Corporate Agent for insurance products.

Details of associate entities of Motilal Oswal Financial Services Limited are

available on the website at

http://onlinereports.motilaloswal.com/Dormant/documents/List%20of%20Associate%20companies.pdf

MOFSL and its associate company(ies), their directors and Research Analyst and their relatives may; (a) from time to time, have a long or short position in, act as principal in, and

buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other

compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have

any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the

specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOFSL even

though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report

MOFSL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the recipients of this report

should be aware that MOFSL may have a potential conflict of interest that may affect the objectivity of this report. Compensation of Research Analysts is not based on any specific

merchant banking, investment banking or brokerage service transactions. Details of pending Enquiry Proceedings of Motilal Oswal Financial Services Limited are available on the

website at

https://galaxy.motilaloswal.com/ResearchAnalyst/PublishViewLitigation.aspx

A graph of daily closing prices of securities is available at

www.nseindia.com, www.bseindia.com.

Research Analyst views on Subject Company may vary based on Fundamental

research and Technical Research. Proprietary trading desk of MOFSL or its associates maintains arm’s length distance with Research Team as all the activities are segregated

from MOFSL research activity and therefore it can have an independent view with regards to Subject Company for which Research Team have expressed their views.

Regional Disclosures (outside India)

This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability

or use would be contrary to law, regulation or which would subject MOFSL & its group companies to registration or licensing requirements within such jurisdictions.

For Hong Kong:

This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong

Kong Securities and Futures Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst

Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412) has an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of

research report in Hong Kong. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity

to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these

securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not

located in Hong Kong & are not conducting Research Analysis in Hong Kong.

For U.S.

Motilal Oswal Financial Services Limited (MOFSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under

applicable state laws in the United States. In addition MOFSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers

Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any

brokerage and investment services provided by MOFSL , including the products and services described herein are not available to or intended for U.S. persons. This report is

intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as

"major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which

this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration

provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange

Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOFSL has entered into a chaperoning agreement with a U.S. registered broker-

dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this

chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S.

registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public

appearances and trading securities held by a research analyst account.

For Singapore

In Singapore, this report is being distributed by Motilal Oswal Capital Markets Singapore Pte Ltd (“MOCMSPL”) (Co.Reg. NO. 201129401Z) which is a holder of a capital markets

services license and an exempt financial adviser in Singapore.As per the approved agreement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and

Paragraph 11 of First Schedule of Financial Advisors Act (CAP 110) provided to MOCMSPL by Monetary Authority of Singapore. Persons in Singapore should contact MOCMSPL

in respect of any matter arising from, or in connection with this report/publication/communication. This report is distributed solely to persons who qualify as “Institutional Investors”,

of which some of whom may consist of "accredited" institutional investors as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (“the

SFA”). Accordingly, if a Singapore person is not or ceases to be such an institutional investor, such Singapore Person must immediately discontinue any use of this Report and

inform MOCMSPL.

Specific Disclosures

1 MOFSL, Research Analyst and/or his relatives have financial interest in the subject company, as they have equity holdings in the subject company.

2 MOFSL, Research Analyst and/or his relatives do not have actual/beneficial ownership of 1% or more securities in the subject company

3 MOFSL, Research Analyst and/or his relatives have not received compensation/other benefits from the subject company in the past 12 months

4 MOFSL, Research Analyst and/or his relatives do not have material conflict of interest in the subject company at the time of publication of research report

5 Research Analyst has not served as director/officer/employee in the subject company

6 MOFSL has not acted as a manager or co-manager of public offering of securities of the subject company in past 12 months

7 MOFSL has not received compensation for investment banking/ merchant banking/brokerage services from the subject company in the past 12 months

8 MOFSL has not received compensation for other than investment banking/merchant banking/brokerage services from the subject company in the past 12 months

9 MOFSL has not received any compensation or other benefits from third party in connection with the research report

10 MOFSL has not engaged in market making activity for the subject company

5 July 2020

AU Small Finance Bank

********************************************************************************************************************************

The associates of MOFSL may have:

- financial interest in the subject company

- actual/beneficial ownership of 1% or more securities in the subject company

- received compensation/other benefits from the subject company in the past 12 months

- other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the

specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOFSL even

though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report.

- acted as a manager or co-manager of public offering of securities of the subject company in past 12 months

- be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the

company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies)

- received compensation from the subject company in the past 12 months for investment banking / merchant banking / brokerage services or from other than said services.

The associates of MOFSL has not received any compensation or other benefits from third party in connection with the research report

Above disclosures include beneficial holdings lying in demat account of MOFSL which are opened for proprietary investments only. While calculating beneficial holdings, It does not

consider demat accounts which are opened in name of MOFSL for other purposes (i.e holding client securities, collaterals, error trades etc.). MOFSL also earns DP income from

clients which are not considered in above disclosures.

Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the

research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.

Terms & Conditions:

This report has been prepared by MOFSL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and

may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent

of MOFSL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in

nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty,

representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The

report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial

instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. MOFSL will not treat recipients as

customers by virtue of their receiving this report.

Disclaimer:

The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or

distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for

informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing

in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances.

The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment

objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this

document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this

document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views

expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade

securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of

the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and

should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make

modifications and alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their directors and the employees may from

time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to

perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a

separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of

information that is already available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or

may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on,

directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or

entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law,

regulation or which would subject MOFSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in

all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost

revenue or lost profits that may arise from or in connection with the use of the information.

The person accessing this information specifically agrees to exempt MOFSL or any of its

affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOFSL or any of its affiliates or employees responsible for any such

misuse and further agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses, costs, damages,

expenses that may be suffered by the person

accessing this information due to any errors and delays.

Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263;

Website

www.motilaloswal.com.CIN

no.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road,

Malad(West), Mumbai- 400 064. Tel No: 022 7188 1000.

Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst:

INH000000412. AMFI: ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579;PMS:INP000006712. Motilal Oswal Asset Management Company

Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth

Management Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is

a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt.

Ltd. which is a group company of MOFSL. Private Equity is offered through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL.

Research & Advisory services is backed by proper research. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no

assurance or guarantee of the returns. Investment in securities market is subject to market risk, read all the related documents carefully before investing. Details of Compliance

Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.

* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National

Company Law Tribunal, Mumbai Bench.

5 July 2020