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Shares of AU Small Finance Bank tumbled over 7 per cent 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 per cent year-on-year (YoY) 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), the difference between interest earned and expended, 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 per cent 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 per cent of gross advances, compared to 1.78 per cent in the same quarter last year. Net NPAs also rose to 0.88 per cent from 0.63 per cent. 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 per cent from 20.11 per cent a year ago. However, core profitability metrics remained largely stable. Annualised Return on Assets (RoA) stood at 1.5 per cent, down slightly from 1.6 per cent, while Return on Equity (RoE) was 13.3 per cent versus 13.2 per cent in Q1FY25. Earnings Per Share (EPS) grew 15 per cent YoY to ₹7.8, and Book Value Per Share (BVPS) increased 14 per cent 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.

AU Small Finance Bank share price dropped as much as 7.3 per cent intraday to a low of ₹736.40, slipping over 12 per cent 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 per cent in the past one year. However, July has seen a reversal in sentiment, with the stock down 10 per cent so far, following three consecutive months of gains—18 per cent in June, 2 per cent in May, and 27 per cent in April. Prior to that, it fell 5.5 per cent in March and 6 per cent in February, after a 7.5 per cent rise in January.

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 per cent 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 per cent year-on-year and was largely led by secured retail assets, while the unsecured book continued to decline. Deposits grew by a strong 31 per cent year-on-year, supported by robust traction in savings account balances, though the CASA ratio remained flat at 29.1 per cent.

The management, the brokerage noted, revised its credit cost guidance higher by 10-15 basis points, now pegged at 1 per cent of gross loan portfolio. As a result, HDFC Securities reduced its FY26E and FY27E earnings estimates by 3 per cent, 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 AU Small Finance 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.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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