AU Small Finance Bank’s Strategic Blueprint to FY2027

Setting the Stage for Future Success

AU Small Finance Bank Limited, a prominent player in India’s banking and financial services sector, has unveiled its ambitious roadmap for the period leading up to 2027. This strategic plan encompasses various aspects of the bank’s operations, including deposit and asset growth, asset quality management, and strategies for enhancing profitability.

Challenges and Opportunities in a Rising Interest Rate Environment

As the interest rate scenario is expected to rise, AU Small Finance Bank anticipates an increase in its cost of funds by 85-90 basis points. However, the bank aims to mitigate the impact by limiting the transmission of increased interest costs on its asset book. Despite facing liquidity tightening during Q3’FY24, the bank remains resilient, focusing on portfolio mix shifts towards newer, lower-yielding assets such as home loans and commercial banking.

Strategic Imperatives for Growth

AU Small Finance Bank’s way forward to 2027 entails a comprehensive strategy aimed at achieving robust growth across various parameters. The bank targets a deposit growth CAGR of approximately 23-25%, with a focus on individual and retail deposits. Additionally, asset book growth will mirror deposit growth, with an emphasis on businesses offering higher returns on assets (ROA). The bank aims to maintain asset quality within a specified range, with provisions covering around 65-70% of credit risk.

Portfolio Mix Optimisation

One of the key strategies outlined by AU Small Finance Bank is the optimisation of its portfolio mix. The bank plans to shift towards higher-yielding, higher RoA assets, aiming for a ratio of approximately 75:25 between high and low-yield assets by FY2027 which is currently approx 70:30. This shift is expected to enhance overall profitability and drive sustainable growth over the long term.

Focus on Branch Banking Profitability

AU Small Finance Bank is committed to enhancing the profitability of its branch banking operations. The bank aims to increase the proportion of profitable branches from 25% to over 65% by 2027. Key strategies include growing current account deposits, expanding branch networks, optimising costs, and cross-selling products to existing customers, particularly in affluent segments.

Leveraging Merger Benefits for Growth

The recent merger of AU Small Finance Bank with Fincare Bank presents significant growth opportunities for the combined entity. With expanded distribution and access to new markets, the merged entity aims to capitalise on synergies to drive higher yields and profitability. The integration process is expected to be completed by March 2025, paving the way for enhanced operational efficiency and improved returns.

Maintaining Credit Quality and Cost Discipline

Credit quality management remains a top priority for AU Small Finance Bank. The bank aims to manage credit costs within a defined range, with a focus on through-the-cycle best-in-class asset quality. Initiatives such as capping the MFI book at 10% of AUM and maintaining a credit cost of 2.5-3% per annum on MFI loans demonstrate the bank’s commitment to prudent risk management.

Conclusion: Charting a Course for Sustainable Growth

In conclusion, AU Small Finance Bank’s strategic blueprint for FY2027 reflects its commitment to achieving sustainable growth and profitability. By focusing on portfolio optimisation, branch banking profitability, leveraging merger benefits, and maintaining credit quality, the bank aims to navigate challenges and capitalise on opportunities in the dynamic banking landscape. With a clear vision and robust execution, AU Small Finance Bank is poised to achieve its goal of delivering superior returns to its stakeholders while contributing to India’s economic development.

Share Performance

AU Small Finance Bank Ltd’s shares are presently trading at Rs 567.15, reflecting a decrease of 0.55% compared to yesterday’s closing value of Rs 570.70. The stock’s 52-week high stands at Rs 813, while its lowest point during the same period was Rs 548.15. Over the past year, the company’s shares have yielded slightly negative returns of 3.95%. Presently, the stock is trading at a 30.2% discount from its highest price in the past 52 weeks.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.