AU Small Finance Bank shares slip post downgrade by Kotak Equities

Shares of AU Small Finance Bank fell nearly 2.5% in early deals on Monday after Kotak Institutional Equities downgraded its rating for the stock from "add" to "sell". However, it raised its target price to ₹700 per share from Rs 650  earlier. The fresh target is still nearly 15% lower from its last closing price.

The bank's shares ended the previous session 0.75% lower at Rs 820.45. 

In the current session, AU Small Finance Bank shares slipped 2.5% to Rs 800.50 on BSE. Market cap of the firm fell to Rs 60,062 crore. 

Kotak cited the stock’s recent price rally as making its risk-reward proposition less attractive, preferring other stocks with more favourable valuations to play cyclical recovery trade. Additionally, Kotak emphasized that while the bank has potential, the current market conditions require cautious optimism.

The bank recently formed a collaboration with the Life Insurance Corporation of India (LIC) to distribute LIC's products, aiming to enhance insurance access for underserved populations. In the fiscal year's fourth quarter, AU Small Finance Bank reported a 10.7% sequential increase in total deposits, reaching ₹1.24 lakh crore.

Its CASA deposits also rose 5.4% from the previous quarter. However, the CASA ratio slightly decreased to 29.2% from 30.6% in the previous quarter. Kotak Institutional Equities noted that overcoming challenges in unsecured businesses could pave the way for future business growth if macroeconomic conditions improve. The partnership with LIC is seen as a strategic move to bolster the bank's service offerings.

Kotak's downgrade highlights the broader market sentiment in a year where the bank has seen substantial stock price growth. Despite this, the bank's involvement with LIC and its strong deposit growth indicate potential for business expansion. The bank's performance, in conjunction with macroeconomic trends, will likely impact future analyst outlooks. Analysts remain divided on the stock, reflecting differing views on its future trajectory amidst evolving market dynamics.