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    AU Small Finance

    AUBANK
    Financial Services·17 Oct 2025
    Management Summary

    AU Small Finance Bank delivered a resilient Q2 FY26, marked by strong deposit and secured loan growth, NIM expansion, and improving asset quality. The bank received in-principle approval for a universal bank license, signaling a strategic shift. While unsecured portfolios saw degrowth, management expects stabilization and positive contribution from Q3 onwards, maintaining confidence in full-year credit cost guidance.

    Highlights

    6

    • H1 Profit After Tax grew 6% YoY to INR1,142 crores, demonstrating resilient performance.

    • Deposit book showed strong growth of 21% YoY and 3.8% QoQ, reaching INR1,32,000 crores, nearly 2x the system growth rate.

    • NIM expanded by 5 bps QoQ to 5.5% in Q2, driven by a 25 bps reduction in cost of funds to 6.83%.

    • Credit cost declined to INR481 crores in Q2, with slippages reducing by 12%, indicating improving asset quality.

    • Received in-principle approval for universal bank license, a pivotal step for future growth and market acceptance.

    • Retail Secured Assets, including Wheels and Mortgages, continued strong performance with 20% YoY growth.

    Concerns

    3

    • Unsecured loan portfolio degrew by 23% YoY and 2% QoQ, forming 8% of total loan portfolio.

    • Operating expense increased 11% YoY and 7% QoQ due to growth in disbursements and manpower investments.

    • Competitive intensity in Micro Business Loans (MBL) has increased, leading to cautious growth in this segment.

    Key financials

    Metrics

    12

    Periods

    3

    Headline

    6
    • Deposit Book
      ₹1.32L Cr
      YoY+21%QoQ+3.8%
    • Total Loan Portfolio
      ₹1.23L Cr
      YoY+17%QoQ+4.5%
    • NIM
      5.5%
      QoQ+0.1%
    • Cost of Funds
      6.8%
      QoQ-0.3%
    • CASA Ratio
      29.4%

    Q2

    4
    • Profit After Tax
      ₹561 Cr
    • Credit Cost
      ₹481 Cr
      QoQ-9.8%
    • ROA
      1.4%
    • ROE
      12.4%

    H1

    2
    • Profit After Tax
      ₹1,142 Cr
      YoY+6%
    • Cost-Income Ratio
      56%

    Segment breakdown

    GLPGLP GrowthShare of Total GLP
    Retail Secured Assets₹83,000 Cr20%67%
    Wheels Book₹40,000 Cr26%33%
    Mortgages₹40,000 Cr14.0%32%
    Gold Loans₹2,300 Cr19%2%
    Commercial Banking—22%—
    Unsecured Segments—-23%—
    MFI₹6,200 Cr—5%
    Credit Card & Personal Loan₹2,900 Cr—2.4%
    Credit Card Book₹2,200 Cr-31%—
    Heatmap· 3 shared metrics

    Capital allocation

    1
    high confidence
    CategoryHeadline
    Liquidity

    Liquidity disclosed

    Capital requirements are expected to come down from 15% minimum capital requirement to eventually 11.5% post universal bank conversion. The impact of the ECL framework is expected to be neutral to positive for the bank.

    Guidance & targets

    10
    CategoryTargetPriority
    Credit Growth
    Total Loan Portfolio Growth
    2x to 2.5x of nominal GDP
    		Medium
    Credit Growth - Wheels
    Wheels Book Annual Growth
    20% to 25%
    		High
    Distribution Expansion
    Wheels Book Branches
    around 1,000 branches
    		High
    Credit Growth - Mortgages
    Mortgage Portfolio Growth
    around 20%
    		Medium
    Asset Quality
    Full Year Credit Cost
    1%
    		High
    Asset Quality
    Slippage Ratio
    2.5% to 3%
    		Medium
    Profitability
    Cost-Income Ratio
    below 60%
    		High
    Efficiency
    Opex to Assets Ratio
    below 4.3%
    		High
    Regulatory Transition
    Universal Bank Conversion
    within 18-month period
    		High
    Cost of Funds
    Cost of SA
    below 5%
    		Medium

    Full Year Credit Cost

    full year FY26
    CurrentH1 credit cost at 1.28% annualized, Q2 at INR481 crores.
    Targetwithin guidance of 1% of average total assets.

    Why it matters

    Key profitability driver, management is confident in achieving 1% for the full year.

    expect full year credit cost to be within our guidance of 1% of average total assets.

    How to verify

    guidance_and_targets[metric='Full Year Credit Cost']

    Risks & concerns

    4
    RiskSeverity

    Unsecured Portfolio Volatility

    The unsecured loan portfolio degrew by 23% YoY and 2% QoQ, though it is now stabilizing and expected to contribute positively from Q3. — Management acknowledged

    medium

    Competitive Intensity in MBL

    Competitive intensity in Micro Business Loans (MBL) has significantly increased, leading to cautious growth in this segment. — Management acknowledged

    medium

    Yield Pressure in Commercial Banking

    Commercial banking faces yield pressure, leading the bank to avoid underwriting lower yield assets. — Management acknowledged

    low

    Seasonality of Business

    The business, especially retail assets, has seasonality, with H2 typically stronger, which can impact quarter-on-quarter comparisons. — Management acknowledged

    low

    Q&A highlights

    8

    “on the credit cost, though our unsecured book contributes about less than 10% of the book, but there is a significant portion of the credit cost was coming from MFI and credit card. Now having said that, in the last quarter, where we called out that our credit cost has peaked in credit card, you would have observed there is a significant reduction in that. And going by the current performance of microfinance book, where we see that it has peaked in this quarter and would come down substantially in Q3 and Q4. So we are very confident, and there is a seasonality attached to our secured asset as well, where we see a strong pullback in H2. And that has been always a trend for so many years. And so considering both the factors where we see the significant drop in the unsecured part on the credit cost as well as the pullback in secured asset in H2, we are confident that our credit cost for the full year will be on the guidance of 1%.”

    Clarifies the drivers of fee income and provides strong confidence on the expected trajectory of credit cost normalization for the full year.

    asked by Mahrukh Adajania

    2 min read6 chapters

    Detailed Narrative

    01

    Strong H1 Performance and Universal Bank Approval

    AU Small Finance Bank reported a resilient H1 FY26 with profit after tax growing 6% year-on-year to INR1,142 crores. The bank achieved a significant milestone by receiving in-principle approval for a universal bank license on August 7, 2025, with an 18-month transition period. This approval is expected to enhance trust, brand acceptance, and optimize the cost of funds over time, positioning the bank for its next phase of growth and wider acceptance across India.

    02

    Robust Deposit and Secured Loan Growth

    The bank's deposit book expanded by 21% year-on-year and 3.8% quarter-on-quarter, reaching INR1,32,000 crores, nearly double the system growth rate. The loan portfolio, excluding unsecured businesses, grew by a strong 22% year-on-year. Total loan portfolio growth stood at 17% year-on-year and 4.5% quarter-on-quarter, reaching INR1.23 lakh crores, primarily driven by flagship Retail Secured Assets (67% of GLP, 20% YoY growth) and Commercial Banking (21% of GLP, 22% YoY growth).

    03

    NIM Expansion and Declining Cost of Funds

    Net Interest Margin (NIM) expanded by 5 basis points quarter-on-quarter to 5.5% in Q2 FY26, up from 5.4% in Q1. This improvement was primarily driven by a sharp decline in the cost of funds, which reduced by 25 basis points to 6.83% in Q2 from 7.08% in Q1. The bank has actively repriced high-cost deposits, including a 25 bps cut in peak SA rates, with further expansion expected in the coming quarters as the deposit book continues to reprice.

    04

    Improving Asset Quality and Credit Cost Normalization

    Asset quality showed signs of improvement, with ex-bucket collection efficiency rising to 98.95% in Q2, the highest in five quarters. The SMA book reduced significantly from 4.3% in Q1 to 2.9% in Q2. Credit cost declined to INR481 crores in Q2 from INR533 crores in Q1, with the annualized H1 credit cost at 1.28%. Management expects the full-year credit cost to be within its guidance of 1% of average total assets, driven by stabilizing unsecured portfolios and seasonal recovery in secured assets.

    05

    Unsecured Portfolio Reset and Future Outlook

    The unsecured loan portfolio, comprising 8% of the total, degrew by 23% year-on-year and 2% quarter-on-quarter. The MFI book (INR6,200 crores, 5% of GLP) saw its degrowth moderate to 1% quarter-on-quarter, while the credit card book (INR2,200 crores) degrew 3% quarter-on-quarter. Management expects these segments to stabilize and begin contributing positively to growth from Q3 FY26 onwards, following corrective actions and a controlled sourcing pace, with a long-term slippage ratio target of 2.5% to 3%.

    06

    Strategic Investments and Operational Efficiency

    Operating expenses increased by 11% year-on-year and 7% quarter-on-quarter, primarily due to growth in disbursements and investments in manpower for pan-India distribution expansion. Despite these investments, the bank maintained disciplined cost control, with opex by total assets falling to 4% in H1 FY26 (from 4.6% in H1 FY25) and a cost-income ratio of 56% in H1. The bank added approximately 4,500 employees this quarter, mainly in sales and underwriting, focusing on market share gain in newer geographies.

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