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On Monday, BofA Securities revised its stance on AU Small Finance Bank Ltd (NSE:AUFI) (AUBANK:IN), elevating the stock rating from Underperform to Buy and increasing the price target to INR800.00, up from the previous INR630.00. The adjustment reflects the firm’s recognition of the bank’s potential for robust growth within the private banking sector and its advantageous position to benefit from a rate cut cycle.
Stifel analysts highlighted AU Small Finance Bank’s strategic reduction in stressed segments such as microfinance and credit cards, while its core segments maintain steady asset quality. This shift has positioned the bank favorably in the eyes of investors, potentially leading to valuation premiums comparable to the Big 4 banks.
The potential approval of AU Small Finance Bank’s universal banking license is identified as a possible re-rating catalyst within the next 6-12 months. This development could further enhance the bank’s attractiveness to investors and contribute to its premium valuation.
BofA Securities’ updated assessment employs a 3.0-3.1x price-to-book (P/B) target multiple derived from a dividend discount model (DDM), which is slightly higher than the target multiple for ICICI Bank. This adjustment is based on increased confidence in the bank’s growth trajectory and return on equity (ROE), with new assumptions of a Stage 1 high growth period featuring an ROE of 16.0% and growth at 19%, an improvement from the previously anticipated 15.5% ROE.
The firm also revised its cost of equity assumption for AU Small Finance Bank to 13.2%, a slight decrease from the former 13.4%. This change in the cost of equity reflects a more favorable risk assessment for the bank’s future financial performance.
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