Over the years, AU Small Finance Bank (AU SFB) has established itself as a preferred lender to the underserved segment in areas of vehicle, SME and MSME finance present. Given that banks have traditionally ignored this segment on account of lower ticket sizes, high operating costs and difficulty in accessing the credit worthiness of the borrower, there is huge unmet demand. This gives an opportunity to players like AU SFB who have developed business models to grow and operate profitably in these segments.
Valuations
Given the strong presence in niche customer segments, AU SFB's profitability will be remain superior to most conventional banks. Despite the migration to SFB, we estimate that AU will report trough RoEs of ~17% in FY18 this will recover to 20% by FY20. This is significantly better than its listed peers which are currently reporting single digit RoEs. As such, valuations at 3.2x book on FY20 are reasonable, and investors can expect strong upside over the next few years.
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