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record provenance
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Quarter read
What the record says.
AU Small Finance Bank reported a resilient Q2 FY26 with PAT of ₹561 crore and H1 PAT of ₹1,142 crore, up 6% YoY. Core secured loan growth was 22% YoY, while total loan growth moderated to 17% due to deliberate unsecured book contraction. NIM expanded 5bps QoQ to 5.5%, driven by a 25bps reduction in cost of funds to 6.83%. Credit costs declined to ₹481 crore from ₹533 crore QoQ, with management guiding full-year credit cost to 1% of average assets. The bank received in-principle approval for a universal banking license, expected to lower funding costs over time. Key drivers include deposit growth of 21% YoY, stabilization in MFI and credit card portfolios, and festive season demand. Risks include elevated slippages in unsecured books and competitive pressure in mortgage business.
Colored figures show movement against the previous available record.
Guidance to track
- Management expects full-year credit cost to be within 1% of average total assets, driven by declining unsecured slippages and seasonal recoveries in H2.
- The bank targets full-year loan growth in the range of 2x to 2.5x of nominal GDP, with core secured assets growing 22% YoY.
- Assuming no further rate cuts, NIM should continue to expand as deposit book reprices and asset mix stabilizes.
- Management targets cost-to-income ratio below 60% and operating expense to average assets below 4.3% over the medium term.
Risks flagged
- MFI and credit card portfolios contribute ~50% of credit costs despite being <10% of loans. Normalization may take longer than expected.
- Increased competition from niche players in micro business loans (MBL) has pressured growth and asset quality, with management cautious on expansion.
- While management downplays one-off costs, branding and marketing expenses could rise during the 18-month transition, impacting cost ratios.
- The Andhra Pradesh vehicle portfolio (~₹1,000 crore) experienced elevated stress in Q1; recovery is underway but may take 6-9 months to normalize fully.
Key quotes
- Q2 marks the bottoming out of the current cycle, with growth staying strong in core businesses, unsecured book beginning to stabilize, uptake in margins, and commencement of reduction in credit costs.
- The agenda is not to degrow or grow some book on some basis... We are having a very clear agenda that growth has to come back.
- Our growth will happen through market share rather than market growth.
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