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What the record says.
AU Small Finance Bank delivered a resilient performance in FY25 despite a challenging macro environment. Deposits grew 27% YoY and loans grew 20% YoY, with secured retail and commercial banking driving growth. PAT stood at INR 2,106 crore with ROA of 1.5%, impacted by elevated credit costs in MFI and credit cards and an accelerated provision of INR 150 crore. Management expects credit costs to normalize to 75-85 bps over the medium term, with FY26 likely at the higher end. NIMs face near-term pressure from rate cuts, but benefits should accrue in H2. The bank is awaiting a universal banking license, expected this calendar year. Key risk: sustained stress in unsecured portfolios could delay credit cost normalization.
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Guidance to track
- Management expects normalized credit cost to be in the range of 75-85 bps, with FY26 likely at the higher end (around 85 bps) due to residual stress in unsecured books in H1.
- MFI credit cost is expected to decline from elevated levels to around 3.5% in FY26, with normalization by H2.
- Credit card credit cost is expected to be in the range of 6-7% for FY26, down from ~12.5% in FY25, with H1 elevated and H2 normalizing.
- Management expects the universal banking license to be granted within calendar year 2025, which will enable capital raising and branding initiatives.
Risks flagged
- With 50 bps repo rate cut, 30% variable rate book will reprice down, while deposit costs may not fall as quickly, pressuring NIMs in H1 FY26.
- Despite improving collection efficiency, the implementation of Anfin guardrails and typical Q1 seasonality could lead to elevated slippages in MFI.
- Management acknowledged that the credit card franchise will take 1-2 years to turn around, with breakeven expected only by FY27.
- Home loan NPA has risen above 1% due to transition issues from the Fincare merger, though management expects it to normalize.
Key quotes
- We want to be very honest on our numbers so that it does not color, we don't want to get it colored by the whole aspect around it.
- It takes about 10 years to build a bank. We have completed eight years, and we are confident that the foundations we are laying today will create a stronger and more sustainable AU tomorrow.
- Microfinance business, again, a right business, maybe at the wrong time, but it's a very, I would say it's fulfilled our whole inclusive agenda of banking.
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