AU Small Finance Bank down 10% in 5 days. Should you buy, hold or sell?

AU Small Finance Bank Ltd slipped 3 per cent in Tuesday's trade to take its losing run to the fifth straight session on BSE. The stock has fallen 10 per cent in the five-day fall and lost 13.33 per cent from its 52-week high of Rs 840.95 hit on July 2. The SFB stock has taken a hit following the June quarter results, thanks to the delay in MFI recovery that has been pushed back by another quarter. Analysts said credit costs to total assets may rise for AU SFB by 10-15 basis points and settle at 1 per cent in FY26. Their target prices ranges in a wide range of Rs 650-880 apiece.

The AU SFB stock is not cheap at 2.6 times FY27 estimated book value (BV), but is a strong compounder, said InCred Equities. The SFB reported return on asset (RoA) of 1.5 per cent & return on equity (RoE) of 13 per cent in 1QFY26. If one goes by InCred, the bank may post RoA of 1.5 per cent in FY27 and 1.7 per cent in FY28. AU SFB is seen clocking RoE of 15.5 per cent in FY27 and 17.5 per cent in FY28, as the asset quality normalizes.

"We revisit our earnings estimates, tweak our sustainable RoE assumptions and trim our risk-free rate because of which our target price rises to Rs 880 (11 per cent upside) against Rs 820 earlier. We assign a target multiple of 2.9x on FY27F BV. Downside risks: Lower-than-expected growth/margin, worsening asset quality trend, and higher-than-expected opex growth," InCred Equities said.

Axis Securities said AU SFB’s overall credit costs tapered sequentially to 1.94 per cent in Q1 against 2.42 per cent in the March quarter. That said, the credit costs in the unsecured portfolios continue to remain elevated. Additionally, apart from the lower collection efficiency (CE) in the MFI book, owing to the more stringent MFIN guardrails, the management has flagged concerns in the mortgage book in the southern states.

"The bank has taken appropriate steps to strengthen the collections and expects a pull-back in H2FY26. On the MFI front, the CE has improved MoM, and the trend is expected to continue," the brokerage said as it suggested a target price of Rs 900 on the stock.

HDFC Institutional Equities said while AU SFB's earnings beat estimates on the back of high treasury gains, core earnings growth at 4 per cent YoY was weak, owing to continued stress in unsecured portfolios. "We cut our FY26E/FY27E estimates by 3 per cent, factoring in softer NIMs (higher secured mix) and slower moderation in credit cost, partly offset by deposit re-pricing starting H2FY26. We maintain REDUCE with a revised target of Rs 610 (2.1x Mar-27 ABVPS)," HDFC Institutional Equities said.

Nuvama finds the risk-reward unfavourable for the stock. Despite a recent fall, its target price suggests further downside.

"After cutting credit cost guidance to 85 bps in Q4FY25, the bank increased it to 1 per cent due to deterioration in MFI/south-based mortgages. NIM shall fall in Q2 as well with the full impact of the 75bp repo rate cut. Maintain ‘REDUCE’ with a revised target of Rs 650/2.5x BV (Rs 530 earlier). The risk-reward remains unfavourable at 3x BV FY26E," it said