The stock, trading at ₹793.75 as of 17 October 2025, has delivered a robust 42.22% return year-to-date, significantly outperforming the Sensex by 34.78 percentage points. However, the shares remain 5.61% below their 52-week high of ₹840.95, reflecting investor caution around near-term profitability pressures and asset quality trends.
| Quarter | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 | Jun'24 | Mar'24 | Dec'23 |
|---|---|---|---|---|---|---|---|---|
| Interest Earned (₹ Cr) | 4,511.28 | 4,378.44 | 4,270.60 | 4,113.48 | 3,910.61 | 3,769.04 | 2,829.50 | 2,735.82 |
| QoQ Change (%) | +3.03% | +2.52% | +3.82% | +5.19% | +3.76% | +33.20% | +3.42% | +8.09% |
| Net Profit (₹ Cr) | 560.87 | 580.86 | 503.70 | 528.45 | 571.21 | 502.57 | 433.34 | 375.25 |
| QoQ Change (%) | -3.44% | +15.32% | -4.69% | -7.49% | +13.65% | +15.97% | +15.48% | -6.62% |
| Net Interest Margin (%) | — | 5.40% | 5.80% | 5.90% | 6.10% | 6.00% | 5.45% | 5.50% |
| CASA Ratio (%) | — | 29.00% | 29.20% | 31.00% | 32.00% | 33.00% | 33.00% | 33.00% |
Financial Performance: Margin Compression Weighs on Profitability
AU Small Finance Bank's Q2 FY26 results revealed a mixed performance characterised by steady top-line growth but persistent pressure on profitability metrics. Interest earned rose 3.03% quarter-on-quarter to ₹4,511.28 crores and expanded 15.36% year-on-year, driven by robust loan book growth. However, the bank's net interest income increased just 4.87% QoQ to ₹2,144.41 crores, reflecting margin compression that has become a recurring theme over recent quarters.
The bank's net interest margin (NIM), a critical profitability indicator for lending institutions, stood at 5.40% in Q2 FY26, down 40 basis points from 6.10% in the year-ago quarter. This contraction reflects intensifying competition in the small finance banking space and rising funding costs. The CASA (current and savings account) ratio further deteriorated to 29.00% in Q2 FY26 from 32.00% a year earlier, indicating growing reliance on costlier wholesale deposits to fund asset growth.
Operating profit before provisions reached ₹1,209.72 crores in Q2 FY26, declining 7.81% quarter-on-quarter despite a 6.89% year-on-year increase. Net profit of ₹560.87 crores translated to a profit after tax (PAT) margin of 12.43%, down from 14.60% in Q2 FY25. The tax rate remained stable at 23.05%, broadly in line with statutory requirements.
Asset Quality: Rising Stress Demands Vigilance
Asset quality emerged as a significant concern during the quarter, with both gross and net non-performing asset (NPA) ratios showing deterioration. The gross NPA ratio rose to 2.47% in Q2 FY26 from 1.98% a year earlier, whilst the net NPA ratio increased to 0.88% from 0.75% over the same period. This upward trend signals growing stress in the loan portfolio, particularly concerning given AU Small Finance Bank's focus on underserved and semi-urban segments where credit risk tends to be elevated.
The provision coverage ratio stood at 83.00% as of June 2025, indicating the bank maintains adequate buffers against potential loan losses. However, the rising NPA trajectory warrants close monitoring, especially as the bank continues to expand its loan book aggressively. Advances grew to ₹107,092.48 crores as of March 2025, representing a 46.39% year-on-year increase, though this rapid expansion raises questions about credit underwriting standards during periods of stress.
⚠️ Asset Quality Alert
Gross NPA ratio climbed 49 basis points year-on-year to 2.47%, marking the highest level in recent quarters. Net NPA ratio increased to 0.88%, up from 0.75% in Q2 FY25. Whilst these levels remain manageable relative to industry standards, the upward trajectory demands enhanced credit monitoring and potentially higher provisioning in coming quarters.
Balance Sheet Strength: Capital Adequacy and Deposit Mobilisation
AU Small Finance Bank's balance sheet expanded significantly during FY25, with total deposits surging 42.54% to ₹124,268.54 crores as of March 2025. This deposit mobilisation capability remains a key competitive advantage, enabling the bank to fund its ambitious growth plans. However, the declining CASA ratio indicates a shift towards higher-cost term deposits, which directly impacts net interest margins.
The bank's shareholder funds stood at ₹17,166.29 crores as of March 2025, reflecting a 36.68% year-on-year increase driven by retained earnings and equity capital expansion. The equity capital base of ₹744.53 crores supports a book value per share of ₹228.90, translating to a price-to-book value ratio of 3.48x at the current market price.
Return on equity (ROE) of 12.82% in Q2 FY26 demonstrates reasonable capital efficiency, though this metric has moderated from higher levels in previous quarters. Higher ROE indicates better utilisation of shareholder capital, and whilst AU Bank's current ROE remains healthy, the downward trend merits attention as margin pressures persist.
| Metric | Mar'25 | Mar'24 | YoY Change |
|---|---|---|---|
| Total Deposits (₹ Cr) | 124,268.54 | 87,182.12 | +42.54% |
| Advances (₹ Cr) | 107,092.48 | 73,162.65 | +46.39% |
| Shareholder Funds (₹ Cr) | 17,166.29 | 12,559.53 | +36.68% |
| Borrowings (₹ Cr) | 11,659.90 | 5,479.37 | +112.82% |
Industry Leadership: How AU Small Finance Bank Compares to Peers
Within the small finance banking universe, AU Small Finance Bank maintains a premium valuation reflecting its market leadership and execution track record. At a price-to-book value of 3.49x, the bank commands a significant premium over peers such as Ujjivan Small Finance Bank (1.59x), Equitas Small Finance Bank (1.05x), and Jana Small Finance Bank (1.19x).
This valuation premium appears justified by AU Bank's superior return on assets (ROA) of 1.38%, materially higher than Ujjivan's 1.11% and Jana's 1.13%, whilst Equitas and Utkarsh Small Finance Bank reported negative ROAs of -0.19% and -1.26% respectively. The bank's asset quality metrics, whilst deteriorating, remain relatively better positioned than peers such as Utkarsh, which reported a gross NPA ratio of 11.42%.
| Bank | P/BV | Div Yield | ROA (%) | Net NPA (%) | Gross NPA (%) |
|---|---|---|---|---|---|
| AU Small Finance | 3.49x | 0.13% | 1.38% | 0.88% | 2.47% |
| Ujjivan Small Finance | 1.59x | 0.00% | 1.11% | 0.70% | 2.52% |
| Equitas Small Finance | 1.05x | 0.00% | -0.19% | 0.98% | 2.92% |
| Jana Small Finance | 1.19x | 0.00% | 1.13% | 0.94% | 2.91% |
| Utkarsh Small Finance | 1.08x | 0.00% | -1.26% | 5.00% | 11.42% |
AU Bank's dividend yield of 0.13%, whilst modest, reflects management's preference to retain earnings for growth rather than distribute cash to shareholders. This strategy aligns with the bank's expansion phase, where reinvestment in branch infrastructure, technology, and loan book growth takes precedence over immediate shareholder returns.
Valuation Analysis: Premium Pricing Tests Investor Patience
Trading at a price-to-earnings ratio of 27.11x and a price-to-book value of 3.48x, AU Small Finance Bank commands a substantial premium to both its small finance banking peers and the broader private banking sector. This valuation reflects market expectations of sustained growth and profitability, though recent quarterly performance raises questions about whether such optimism remains warranted.
The bank's PEG ratio of 1.01x suggests the valuation is broadly in line with expected earnings growth, though this metric assumes growth rates can be sustained despite current margin pressures. The stock's classification as "Very Expensive" by valuation metrics indicates limited margin of safety at current levels, particularly concerning given the deteriorating asset quality trends and margin compression.
Valuation Dashboard
P/E Ratio (TTM): 27.11x | P/BV Ratio: 3.48x | PEG Ratio: 1.01x | Dividend Yield: 0.13%
Overall Assessment: Very Expensive | 52-Week Range: ₹479.00 - ₹840.95
The stock's year-to-date return of 42.22% significantly outpaced the Sensex's 7.44% gain, generating alpha of 34.78 percentage points. However, the shares remain 5.61% below their 52-week high, reflecting profit-booking and cautious sentiment around near-term earnings visibility. Over longer timeframes, the stock has delivered 15.68% returns over one year and 28.90% over three years, demonstrating resilience despite periodic volatility.
Shareholding: Institutional Confidence Remains Intact
AU Small Finance Bank's shareholding pattern reveals strong institutional support, with foreign institutional investors (FIIs) holding 37.68% as of June 2025, up 2.10 percentage points from the previous quarter. This increase signals continued confidence from global investors despite near-term operational challenges. Mutual fund holdings also expanded to 20.55% from 20.17% quarter-on-quarter, with the number of mutual fund schemes increasing from 27 to 31.
Promoter holding remained stable at 22.85%, with founder Sanjay Agarwal maintaining a 15.73% stake and Jyoti Agarwal holding 3.17%. The absence of promoter pledging provides comfort regarding governance and financial stability. Insurance company holdings surged to 5.81% from 4.07% in the previous quarter, reflecting growing interest from long-term institutional investors.
| Category | Jun'25 | Mar'25 | Dec'24 | QoQ Change |
|---|---|---|---|---|
| Promoter | 22.85% | 22.87% | 22.88% | -0.02% |
| FII | 37.68% | 35.58% | 39.35% | +2.10% |
| Mutual Funds | 20.55% | 20.17% | 17.11% | +0.38% |
| Insurance | 5.81% | 4.07% | 3.30% | +1.74% |
| Other DII | 2.52% | 2.92% | 1.37% | -0.40% |
| Non-Institutional | 10.59% | 14.38% | 15.99% | -3.79% |
Total institutional holdings stood at 66.56%, underscoring the professional investor community's conviction in AU Bank's long-term prospects. The decline in non-institutional holdings by 3.79 percentage points suggests retail investors have been booking profits at elevated valuations, a prudent strategy given the stock's substantial year-to-date gains.
Stock Performance: Momentum Moderates After Strong Rally
AU Small Finance Bank's stock has demonstrated impressive momentum across most timeframes, though recent technical indicators suggest the rally may be losing steam. The shares gained 4.01% over the past week and 11.98% over the past month, significantly outperforming the Sensex's 1.76% and 1.52% returns over the same periods. This generated alpha of 2.25 percentage points and 10.46 percentage points respectively.
Over six months, the stock surged 35.22% compared to the Sensex's 6.87% gain, delivering alpha of 28.35 percentage points. Year-to-date performance of 42.22% versus the Sensex's 7.44% translates to alpha of 34.78 percentage points, positioning AU Bank among the top performers in the banking sector during 2025.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | +4.01% | +1.76% | +2.25% |
| 1 Month | +11.98% | +1.52% | +10.46% |
| 3 Months | -0.15% | +2.06% | -2.21% |
| 6 Months | +35.22% | +6.87% | +28.35% |
| YTD | +42.22% | +7.44% | +34.78% |
| 1 Year | +15.68% | +3.64% | +12.04% |
| 3 Years | +28.90% | +43.73% | -14.83% |
However, the three-month return of -0.15% versus the Sensex's 2.06% gain indicates recent momentum has stalled, with the stock generating negative alpha of 2.21 percentage points. Technical indicators turned "Mildly Bullish" on 15 October 2025, downgraded from "Bullish," suggesting weakening momentum. The stock trades above all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), providing technical support, though the recent trend change warrants caution.
Investment Thesis: Quality Franchise Facing Near-Term Headwinds
AU Small Finance Bank's investment case rests on its established franchise in underserved markets, strong deposit mobilisation capabilities, and proven management execution. The bank maintains an "Excellent" quality grade, reflecting consistent profitability and operational excellence over multiple years. However, the current financial trend is classified as "Flat," indicating near-term challenges that require resolution before the growth trajectory can resume.
KEY STRENGTHS
- Strong institutional backing with 66.56% holdings from FIIs, mutual funds, and insurance companies
- Robust deposit mobilisation capability with 42.54% YoY growth to ₹124,268.54 crores
- Healthy ROE of 12.82% demonstrates efficient capital utilisation
- Excellent quality grade reflecting consistent operational performance
- Market leadership in small finance banking with premium valuation justified by superior metrics
- Zero promoter pledging indicates strong governance and financial stability
- Expanding institutional investor base with increasing mutual fund and insurance participation
KEY CONCERNS
- Net interest margin compressed 40 bps YoY to 5.40%, pressuring profitability
- CASA ratio deteriorated to 29.00% from 32.00%, increasing funding costs
- Gross NPA ratio climbed 49 bps YoY to 2.47%, signalling asset quality stress
- Net NPA ratio increased to 0.88% from 0.75%, requiring enhanced monitoring
- Net profit declined 1.81% YoY despite strong top-line growth
- Valuation classified as "Very Expensive" with P/E of 27.11x and P/BV of 3.48x
- Technical trend downgraded to "Mildly Bullish," suggesting weakening momentum
Outlook: What to Watch in Coming Quarters
The trajectory for AU Small Finance Bank over the next 12-18 months will largely depend on management's ability to stabilise net interest margins whilst containing asset quality deterioration. The bank's aggressive growth strategy, whilst delivering market share gains, has come at the cost of margin compression and rising credit costs. Investors should monitor several key indicators to assess whether the current challenges represent temporary headwinds or structural concerns.
POSITIVE CATALYSTS
- Stabilisation of CASA ratio above 30% through enhanced retail deposit mobilisation
- Net interest margin recovery towards 5.75-6.00% range as competitive intensity moderates
- Gross NPA ratio peaking and beginning to decline in H2 FY26
- Continued institutional investor accumulation supporting valuations
- Operating leverage benefits as scale economies improve efficiency ratios
RED FLAGS
- Further deterioration in CASA ratio below 28%, significantly increasing funding costs
- Gross NPA ratio breaching 3.00%, requiring material provisioning increases
- Net interest margin falling below 5.00%, severely impacting profitability
- Foreign institutional investor selling exceeding 2% in any single quarter
- Credit growth decelerating below 30% YoY, signalling market share loss
"AU Small Finance Bank's premium valuation demands flawless execution—current margin pressures and rising NPAs test whether the franchise quality justifies the price investors are paying."
The Verdict: Hold for Existing Investors, Wait for Fresh Entry
Score: 65/100
For Fresh Investors: The current risk-reward appears unfavourable given the "Very Expensive" valuation and near-term operational challenges. Margin compression and rising asset quality stress require resolution before initiating positions. Consider waiting for either a meaningful price correction (towards ₹650-700) or clear evidence of margin stabilisation and NPA peaking before deploying capital.
For Existing Holders: The bank's strong franchise, robust institutional backing, and healthy ROE justify maintaining positions despite near-term headwinds. However, closely monitor quarterly results for signs of sustained margin pressure or accelerating NPA formation. Consider partial profit-booking if the stock approaches ₹850-900 levels or if asset quality deteriorates materially beyond current levels.
Fair Value Estimate: ₹720-750 (9.3% downside from current levels)
The Hold rating reflects AU Small Finance Bank's undeniable quality as a franchise balanced against elevated valuations and near-term execution challenges. Whilst the long-term growth story remains intact, patience is warranted until margin trends stabilise and asset quality concerns abate.
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
