AU Small Finance Bank—weighed down by industry headwinds, but set for a turnaround

Subscribe to enjoy similar stories. AU Small Finance Bank has cemented its position as a market leader, with a strong track record spanning over two decades and assets exceeding ₹1 trillion. Its extensive presence across the country, particularly in semi-urban and rural areas, has bolstered its deep distribution network.

The bank has also applied for a universal banking licence, a move expected to strengthen its market standing. However, despite its solid fundamentals, AU’s stock has remained rangebound for nearly four years, weighed down by industry headwinds. Recent stress in unsecured lending has added to the challenges.

Read this | MFI stress may weigh on small finance banks’ loan growth, asset quality in short term Yet, the bank appears well-positioned for a turnaround now, aided by favourable macroeconomic conditions and regulatory support. The merger of Fincare Small Finance Bank into AU in April 2024 expanded its geographical footprint into southern India and broadened its product portfolio to include microfinance loans. With yields exceeding 25%, these loans significantly outpace AU’s overall yield of 14.4%, enhancing its book yields.

Despite the higher credit costs associated with microfinance, the acquisition initially boosted AU’s net interest margin (NIM), which rose from 5.1% in Q4FY24 to 6% in Q1FY25—the first quarter post-merger. However, indiscriminate lending over recent years in the unsecured segment has led to rising stress, particularly in unsecured retail lending. While asset quality concerns have emerged across the board, the most severe deterioration has been in the unsecured retail segment.