Shares of AU Small Finance Bank tumbled over 7 percent in intra-day trading on Monday after the lender reported a deterioration in its asset quality for the quarter ended June 2025 (Q1FY26), despite healthy growth in profit, income, and other key financial metrics.
The private sector lender posted a net profit of ₹580.9 crore in Q1FY26, up 15.6 percent year-on-year from ₹503 crore in the corresponding quarter last year. Total income rose sharply to ₹5,189 crore during the quarter, compared to ₹4,278 crore in Q1FY25, according to the bank’s regulatory filing.
Net Interest Income (NII) increased to ₹2,045 crore from ₹1,921 crore a year ago, supported by higher interest earnings, which rose to ₹4,378 crore from ₹3,769 crore in the year-ago period. The Gross Loan Portfolio (GLP) also witnessed an 18 percent jump to ₹1,17,624 crore from ₹99,792 crore.
However, investor sentiment soured as the bank’s asset quality came under pressure. Gross Non-Performing Assets (NPAs) climbed to 2.47 percent of gross advances, compared to 1.78 percent in the same quarter last year. Net NPAs also rose to 0.88 percent from 0.63 percent. As a result, provisions and contingencies nearly doubled to ₹533 crore from ₹283 crore, denting the asset quality narrative.
The bank’s capital adequacy ratio slipped to 19.42 percent from 20.11 percent a year ago. However, core profitability metrics remained largely stable. Annualised Return on Assets (RoA) stood at 1.5 percent, down slightly from 1.6 percent, while Return on Equity (RoE) was 13.3 percent versus 13.2 percent in Q1FY25. Earnings Per Share (EPS) grew 15 percent YoY to ₹7.8, and Book Value Per Share (BVPS) increased 14 percent YoY to ₹239.
Commenting on the results, Sanjay Agarwal, Founder, MD & CEO of AU Small Finance Bank, said, “India’s economy stands at an important crossroads. The policy environment has turned supportive, with easing inflation, surplus liquidity, and expectations of a good monsoon, although demand recovery remains uneven. While global uncertainties persist, the strength of India’s domestic economy provides a strong counterbalance.”
He added that the bank remains “cautiously optimistic” and is focused on building a sustainable and broad-based franchise through deeper customer engagement, wider distribution, and disciplined credit practices. “We have delivered another consistent performance in a seasonally soft quarter, showing sustainable growth in deposits, assets, and profitability,” he said.
Stock Performance
The stock dropped as much as 7.3 percent intraday to a low of ₹736.40, slipping over 12 percent from its 52-week high of ₹840.95 hit earlier this month. It had earlier touched a 52-week low of ₹479 in March 2025. Despite the recent fall, the stock has risen over 25 percent in the past one year. However, July has seen a reversal in sentiment, with the stock down 10 percent so far, following three consecutive months of gains—18 percent in June, 2 percent in May, and 27 percent in April. Prior to that, it fell 5.5 percent in March and 6 percent in February, after a 7.5 percent rise in January.
AU Small Finance Bank Q1 Review
HDFC Securities said AU Small Finance Bank’s Q1FY26 earnings exceeded expectations, primarily due to higher treasury gains. However, the brokerage noted that core earnings growth remained muted at 4 percent year-on-year, largely impacted by stress in the unsecured portfolio segments such as microfinance (MFI) and credit cards (CC), along with newly emerging stress in the used small and heavy commercial vehicle (SCV/HCV) segments and the south-based mortgage book. This resulted in elevated slippages and compressed net interest margins (NIMs).
According to HDFC Securities, loan growth stood at 18 percent year-on-year and was largely led by secured retail assets, while the unsecured book continued to decline. Deposits grew by a strong 31 percent year-on-year, supported by robust traction in savings account balances, though the CASA ratio remained flat at 29.1 percent.
The management, the brokerage noted, revised its credit cost guidance higher by 10-15 basis points, now pegged at 1 percent of gross loan portfolio. As a result, HDFC Securities reduced its FY26E and FY27E earnings estimates by 3 percent, factoring in lower NIMs due to a rising share of secured assets and a slower-than-expected decline in credit costs. This, however, was partially offset by expectations of deposit repricing benefits beginning in the second half of FY26.
However, it retained its ‘REDUCE’ rating on the stock and revised its target price to ₹610, valuing the bank at 2.1 times its estimated adjusted book value per share for March 2027.
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