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AU Small Finance Bank reported Q2 FY24 PAT of INR 402 crore, up 17% YoY, driven by strong fee income growth from insurance and credit cards. NIM stood at 5.5%, with pressure from structural mix shift toward lower-yielding businesses. Deposits grew 30% YoY and 9% QoQ, but CASA ratio declined. The bank announced a transformative all-stock merger with Fincare Small Finance Bank, adding MFI and gold loan capabilities, expanding touchpoints to ~2,300, and deepening presence in South India. Management expects the merger to be EPS-accretive with synergies over 2-3 years. Key risks include integration challenges, elevated credit costs from MFI cyclicality, and sustained margin compression from competitive deposit pricing.
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Guidance to track
- Management guided for on-balance sheet advances growth of 25-26% for FY24, driven by liability growth.
- NIM of 5.5% in Q2 remains within the guided range for the full year, despite structural pressure.
- Full-year cost-to-income ratio expected to land similar to last financial year, despite investments.
- Post-merger, MFI will be 8% of balance sheet, intended to be kept around 10% going forward.
Risks flagged
- Merging with Fincare adds 15,000 employees and 1,300 touchpoints; cultural and operational integration could distract management.
- MFI business has inherent cyclicality with credit costs spiking every 3-5 years; management plans conservative provisioning but risk remains.
- NIM declined to 5.5% due to structural mix shift and rising deposit costs; further pressure expected if competition intensifies.
- CASA ratio declined 4pp since March; tight liquidity and high competition may keep cost of funds elevated.
Key quotes
- I strongly believe we remain on course in our business in terms of deposit growth, asset growth, people, and technology, and are putting our best foot forward to handle challenges, uncertainties due to macroeconomic environment.
- This is just not a merger of two entities. It is a union of shared values, common goals, and a vision for the future.
- I can assure you that, again, AU will build one of the... We'll try to build or we'll try to show that, you know, this integration, this M&A can be so different from the previous ones, you know?
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