AU Small Finance Bank universal bank licence: Nirmal Bang ups stock price target. Here's why

AU Small Finance Bank (AU SFB) saw its shares rising 12 per cent in the past one month, as the stock cut its year-to-date losses to 10.46 per cent. The stock is in news after the SFB submitted an application to the Reserve Bank of India (RBI) for voluntary transition to a universal bank from small finance bank .

Nirmal Bang Institutional Equities has revised its earnings estimates upwards for AU SFB by 5.5 per cent for FY25 and 6.5 per cent for FY26 on assumption of 24.5 per cent CAGR in loan book over FY24-FY26. It values AU SFB at 3 times estimated September 2026 adjusted book value against a five-year average P/ABV multiple of 2.94 times. The brokearge suggested a target price of Rs 811 for AU SFB against Rs 745 earlier.

"Considering that the merger integration with Fincare SFB is well underway and the prospects of AU SFB becoming a universal bank, we have a positive view on AU SFB. Maintain ‘BUY'," it said.

If AU SFB gets universal bank licence, the perception of the bank among customers may improve and result in enhanced business opportunities, said Nirmal Bang Institutional Equities. In international business, becoming a universal bank will improve the ease of doing business for AU SFB, as globally there is no concept of SFB, the domestic brokerage said noting the concept is unique to India, as a result of which international business is not smooth for SFBs.

"SFBs are not allowed to collect taxes on behalf of government, which AU will be able to do on conversion to a universal bank. In infrastructure projects, SFBs can’t participate in toll and annuity collections, in which universal banks are present. The bank will also be able to get government agency business which is a big pool of money. Universal banks through relationships with large corporates get CA balances and corporate salary accounts, which is another major source of funding that will open up for AU," it said.

Upon becoming a universal bank, over a period of time cost of funds has the potential to decline by 25 bps, Nirmal Bang said adding that the PSL norms will also get relaxed from 75 per cent of NDTL to 40 per cent of NDTL.

Nirmal Bang noted that 50 per cent of loans of an SFB need to be less than Rs 25 lakh, which is not there in case of a universal bank. Besides, there would be release of capital as CAR requirement will go down from 15 per cent for the SFB to 11.5 per cent.

The brokerage met the management of AU SAB represented and noted that the merger with e-Fincare is well on track.

"e-Fincare is operating as the 6th business unit of AU SFB. The asset quality of microfinance business is relatively better as compared to peers and the bank has kept guardrails in the form of geographic and loan amount wise caps and compulsory e-KYC and bureau checks," it said.

AU SFB has given a FY25 loan and deposit growth guidance of 25 per cent, NIM guidance of 5.7-5.8 per cent; cost to income ratio guidance of 62-63 per cent, credit cost guidance of 1.1-1.2 per cent and RoA guidance of 1.6 per cent.