AU Small Finance Bank shares declined more than 8% on Monday despite the lender reporting a 53% year-on-year increase in net profit for the second quarter of FY27.
The sharp fall came amid concerns over shrinking margins, rural lending risks and asset quality, even as lower provisions supported profitability.
The bank reported a net profit of ₹857.7 crore for the July-September quarter, compared with ₹561 crore a year earlier.
Profit Rises, Margins Decline
Net interest income (NII) increased 31.5% year-on-year to ₹2,820.1 crore from ₹2,144.4 crore.
Provisions declined to ₹359.4 crore from ₹480.8 crore in the corresponding quarter last year and ₹371.5 crore sequentially.
The gross non-performing assets ratio improved to 1.99% from 2.10% in the preceding quarter. However, the net non-performing assets ratio increased to 0.81% from 0.76%.
Net interest margin (NIM) contracted by nine basis points quarter-on-quarter to 5.8%.
Management expects continued margin pressure because of deposit competition and liquidity conditions.
The bank is targeting approximately 25% deposit growth and overall business expansion of around 2.5 times nominal gross domestic product (GDP) growth.
Management Flags Rural Stress, Credit Cost Risks
AU Small Finance Bank expects FY27 credit costs of approximately 0.9%, compared with 0.73-0.74% during the first half. Its long-term credit cost guidance remains at 0.9-1%.
Management highlighted seasonal stress in tractor financing but said unsecured lending trends were improving.
It identified deficient rainfall, El Niño conditions and elevated oil prices as potential risks, with the December quarter expected to provide greater clarity.
Gold loan growth moderated following a correction in gold prices, while the loan-to-value ratio remained stable at 75%.
The bank mobilised $230 million through Foreign Currency Non-Resident (Bank), or FCNR(B), deposits.
It also expects its cost-to-assets ratio to improve during FY27 despite expansion.
Proposed insurance distribution changes by the Insurance Regulatory and Development Authority of India (IRDAI) could affect fee income, although foreign exchange, cards and transaction banking may partly offset the impact.
