Shares of sank as much as 10% to an intraday low of Rs 846 on the BSE on Monday, despite the lender reporting a 53% year-on-year jump in second-quarter net profit to Rs 858 crore from Rs 561 crore a year earlier, supported by business expansion and improved asset quality.




The bank's net interest margin (NIM), a key measure of profitability, rose to 5.8% in the quarter from 5.5% in the corresponding period last year. Asset quality also improved, with the gross non-performing assets (NPA) ratio declining 42 basis points (bps) to 1.99% at the end of September.




Provisions fell 25% to Rs 359 crore from Rs 481 crore, while the net NPA ratio improved by 7 bps to 0.81%. Annualised declined to 0.8% from 1.2% a year earlier, a reduction of 45 bps. One basis point is one-hundredth of a percentage point.




AU Small Finance Bank's pre-provision operating profit (PPOP) rose 28% year-on-year to Rs 1,514 crore in the second quarter from Rs 1,210 crore in the year-ago period. Net interest income (NII) increased 32% to Rs 2,820 crore from Rs 2,144 crore.



Buy, sell or hold AU Small Finance Bank shares?


has maintained its Buy rating on AU Small Finance Bank while lowering its target price to Rs 1,250, implying an upside of 34%. The brokerage noted that gross slippages were marginally above estimates but remained flat year-on-year at 3.1% of loans outstanding in the previous year. Slippages were primarily driven by the tractor portfolio due to seasonality, while asset quality in the unsecured book improved. Credit costs, however, came in below estimates at 1% of average loans.




Jefferies highlighted higher write-offs reflecting tighter policies, a change in the non-performing loan mix, including some microfinance loans covered by CGGMU, and a 200-basis-point quarter-on-quarter decline in the coverage ratio, including write-offs. The gross NPL ratio stood at 2%, with specific coverage at 60%.




The brokerage has lowered its earnings estimates by 1-5% to account for higher operating expenses and tighter bancassurance fee norms. It expects loans to grow at a 23% CAGR and profits at a 28% CAGR over FY27-29, using FY27 as the normalised base. Return on equity is projected to improve to 15-16%, with further upside possible from a stronger franchise following the transition to a universal bank.




has retained its Buy rating on AU Small Finance Bank with a target price of Rs 1,275, indicating an upside of 37%. The brokerage said the bank delivered a healthy quarter, supported by steady growth and lower credit costs. Net interest margins contracted 9 basis points quarter-on-quarter, primarily due to the seasonally higher day count and changes in the asset mix.




Motilal Oswal noted that AU Small Finance Bank continues to deliver among the strongest growth rates in the industry, supported by its high-yielding asset mix and strong business momentum. The brokerage remains positive on the bank's underlying growth trajectory. It expects operating expenses to moderate, bringing the cost-to-income ratio down to around 55-56% over FY27-28E. Credit costs stood at 0.8%, below the bank's guidance of 0.9%.



Management commentary


In its commentary on the quarter, the bank's management said Q2FY27 performance came against a changing geopolitical and macroeconomic backdrop, with domestic demand remaining resilient, consumption improving and economic activity holding steady.




The operating environment continued to be shaped by shifts in monetary policy and liquidity conditions, while competition in lending and deposits remained intense.




Consumer sentiment remained positive with the start of the festive season, and business activity continued to be healthy across key markets. Regulatory priorities remained focused on governance, customer protection, responsible lending and operational resilience.




Meanwhile, the growing adoption of digital technologies and advances in technology and artificial intelligence (AI) continued to transform customer engagement and operating models, creating opportunities for greater efficiency, innovation and sustainable growth.




Against this backdrop, AU Small Finance Bank said it delivered a strong performance while focusing on strengthening customer relationships, expanding its deposit and liability franchise, developing technology-led capabilities and leveraging AI. The bank added that it maintained a disciplined approach to growth, profitability and asset quality while delivering consistent performance across key business parameters.



Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers .