AU Small Finance shares fall 9.45% despite 53% profit growth in second quarter
Key Facts
AU Small Finance Bank shares fell as much as 9.45% during trading on October 26, reaching an intraday low of 845.65 rupees on the BSE, after the bank reported 53% year-on-year growth in net profit in the second quarter of fiscal 2027. Profit rose to 858 crore rupees from 561 crore rupees in the year-earlier period, according to the bank's statement. The board approved the unaudited results for the quarter and half-year ended September 30, 2026, on October 24. The shares fell despite growth in profit and interest income, as investors focused on delinquencies and valuations. Business Standard attributed the decline to investor concerns about rising delinquencies and valuation issues, despite the strong performance reported by the bank.
Net interest income rose 32% year on year to 2,820 crore rupees from 2,144 crore rupees in the second quarter of fiscal 2026, the bank said. Net interest margin reached 5.8%, up 33 basis points year on year, according to Business Standard. The quarter-on-quarter comparison was weaker, however: the earnings call showed a 9-basis-point decline from the previous quarter to the same level of 5.8%. The two comparisons point to different trends: an annual improvement in the margin alongside a quarterly decline. Management said scope to reduce the cost of funds was limited amid tight liquidity and expected margins to remain broadly stable.
Deposits stood at 170,460 crore rupees at the end of the September quarter, up 28.6% year on year, while current and savings account deposits were 50,289 crore rupees, up 29%, according to data reported by Business Standard. Deposit growth shows that the funding base continued to expand during the quarter, while current and savings account deposits grew at a similar annual pace. Management linked limited scope to reduce the cost of funds to tight liquidity, which could constrain margin improvement despite deposit growth. Funding costs therefore remain a factor affecting the profitability of lending. The bank said net interest income grew faster than earnings, posting an annual increase of 32%.
On asset quality, gross non-performing assets stood at 1.99%, an improvement of 42 basis points year on year, while net non-performing assets reached 0.81%, an improvement of 7 basis points, according to the bank's statement. Business Standard reported a different quarterly comparison, with gross and net delinquencies rising 24 and 18 basis points, respectively, during the quarter. It attributed the quarterly increase to the seasonality of tractor bills and said the two ratios improved year on year by 70 and 42 basis points, respectively. Management reiterated its through-the-cycle credit cost forecast of between 90 and 100 basis points. The bank, meanwhile, said credit cost, including the guarantee premium, fell 45 basis points year on year to 0.8% from 1.2%.
Analysts offered mixed views on the stock after the results. Emkay Global maintained its “Reduce” rating and 950-rupee price target, saying current valuations offered a limited margin of safety amid economic uncertainty. It also said higher operating expenses linked to the expansion of branches and asset centres weighed on results, according to Business Standard. JM Financial, by contrast, maintained its “BUY” rating but cut its price target to 1,110 rupees from 1,165 rupees. The firm said the net interest margin trajectory in a rising-rate environment and the bank's reliance on insurance income were factors to watch. It estimated insurance income accounted for about 14% of the bank's pre-tax profit, compared with about 5% for the group of banks it covers, in the context of a consultation paper issued by the Reserve Bank of India.