Motilal Oswal initiates a resolute BUY recommendation on AU Small Finance Bank, setting a target price of Rs875. The bank finds itself at a transformative juncture—bolstered by robust growth metrics, improving asset quality, and the pivotal transition toward a universal banking license. The research underscores AU’s potent mix of loan and deposit expansion, margin resilience, efficiency gains, and risk mitigation. Recent price corrections make the present risk-reward especially compelling for investors. Amid sectoral headwinds in unsecured lending and cards, management’s disciplined execution ensures a springboard for accelerated earnings through FY28. With festival-driven demand and GST cuts set to revive credit momentum in the vehicle sector and granular deposit mobilisation keeping the liability base strong, AU Small Finance Bank emerges as a high-conviction investment for long-term portfolios.

Motilal Oswal’s Investment Thesis

BUY Recommendation with Rs875 Target Price
Motilal Oswal reiterates its BUY call on AU Small Finance Bank, anchoring a 12-month upside at Rs875 per share, underpinned by healthy operating metrics and sustained high growth in both loans and deposits. The recommendation is predicated on forward earnings and the bank’s strength in asset quality, cost control, and brand expansion.

Risk-Reward Profile Significantly Improved
After a recent correction, AU’s valuation offers strong upside potential. The investment logic rests on a structural improvement in credit costs, bottoming asset quality stress, and demonstrable earnings acceleration likely from the second half of FY26 onwards.

Growth Dynamics and Segmental Outlook

Stellar Loan Growth Ahead
Loan growth remained robust at 23% YoY in Q1 FY26 and is projected to compound at 24% over FY26-28. Short-term softness due to vehicle finance and GST-linked purchase deferrals will likely abate from Q3, leading to a revival. Secured loan segments—wheels, mortgages, small business loans, and gold—ensure sustained traction.

Healthy Deposit Mobilisation
Deposits soared 31% YoY in Q1, positioning AU as an industry leader. Stable deposits, comprising CASA, retail TDs, and bulk TDs, account for nearly 79% of the liability base, signalling strong granularity for future growth.

Margin, Cost, and Efficiency Trends

NIMs to Rebound After Short-Term Dip
1Q FY26 saw NIM contraction to 5.4%—primarily due to loan repricing and elevated slippages. However, margins should recover from Q3 as cost of funds gradually ease and asset yields stabilise.

Cost Ratios Declining, Efficiency Rising
AU’s Cost-to-Income (CI) ratio improved sharply from 65% (FY24) to 56.5% (FY25) and further to 54% in 1QFY26. Treasury gains and prudent expense management reinforce the bank’s operational discipline, with the CI ratio projected to settle around 56% for FY26, declining thereafter.

Universal Banking License: Macro Catalyst

Regulatory Inflection Point
The RBI’s in-principle nod for a universal banking license opens new growth vectors—especially in larger-ticket retail, SME, and mid-corporate business. The license enhances AU’s ability to lower funding costs, mobilise more CASA, and diversify its borrower base, improving portfolio resilience.

Competitive Rate Leverage
AU maintains competitive deposit rates, offering 2.75%–6.75% for savings accounts and up to 7.10% for certain term deposits, making it attractive compared to private and small finance bank peers.

Asset Quality, Provisioning, and Risk Control

Cyclical Asset Quality Stress Nearing End
Gross NPAs rose modestly by 19bp QoQ to 2.47% in Q1 FY26, driven by MFI seasonal weakness and stress in the cards portfolio. Management anticipates peak stress in Q2; from the second half, improved credit guardrails and sector stabilisation should enable normalisation.

Provisioning Decline, Sustainable Credit Cost
Provisions in Q1 stood at 34bp, with Q2 estimates near 30bp. The bank’s full-year credit cost guidance is set at 1% of average assets, and medium-term sustainable levels are expected to moderate further to 75–85bp.

Financial Performance and Valuations

Earnings and Returns to Accelerate
AU is forecast to deliver 33% earnings CAGR (FY26–28), with Return on Assets (RoA) recovering to 1.7% by FY27 and Return on Equity (RoE) nudging up to 16.8%. This profit trajectory is anchored by margin expansion, cost control, and lower credit costs.

Valuation Remains Attractive
At the current market price, AU trades at 2.8x FY27E BV—compelling relative to sector averages and justifying an aggressive growth premium.

Investment Levels, Targets, and Peer Comparison

Key Levels for AU Small Finance Bank

Current Price (23 Sep 2025): Rs706

12-Month Target Price: Rs875

Support Zone: Rs690

Resistance Zone: Rs841

Peer Deposit Rates Table

Strategic Takeaways and Analyst Perspective

High Conviction, Medium-Term Growth Story
AU Small Finance Bank demonstrates a rare confluence of growth, discipline, and future-proofing with its transition to a universal bank, granular deposit base, and sector-leading efficiency metrics. Investors can expect strong returns at current levels.

Investment Thesis Summary

BUY at current market price (Rs706)

12-Month Target: Rs875

Near-term volatility possible, medium-term upside dominant

Earnings to compound at 33% CAGR, RoE to reach 16.8%

Asset quality and credit cost stabilisation should reinforce investor confidence

For investors seeking resilience, scalability, and potent earnings growth, AU Small Finance Bank stands apart as a marquee financial sector play going into FY27 and beyond.