06 Jul , 2021 By : Kanchan Joshi
Amid worries that small finance banks would bear the brunt of the second wave’s adverse impact, AU Small Finance Bank’s June quarter update brought some cheer.
In an early update filed with exchanges, the lender reported a 2% sequential contraction in its loan book which was along expected lines. The bank’s asset under management (AUM) shrank by 3% sequentially. The second wave of the pandemic has triggered lockdowns across most states in the country during the first quarter although restrictions were less than those during the nationwide lockdown last year. Most lenders had indicated that loan growth and asset quality can come under pressure due to the lockdowns. Indeed, mobility gauges had shown a deceleration and even large lenders such as HDFC Bank reported an impact.
What brought relief to investors of AU Small Finance Bank was the stability in collection efficiencies during the first quarter of the current year. Collections rose to 114% in June from 94% and 95% in May and April respectively. Collections during the months last year were far lower. Given the strong collection numbers, the bank said that its bad loan pile reduced by Rs8 crore on a net basis during the quarter. To be sure, collections are lower than the average of the previous quarter but the drop is expected in the wake of the pandemic.
What investors should watch out for is the insurance AU Small Finance Bank has by way of provisions. As of March, the bank’s provision coverage ratio was 50% which was lower than a year ago. The bank needs to improve its coverage ratio.
Shares of the lender have surged more than 8% today after the quarterly update. Despite this rise, shares are still down about 7% since April and have underperformed peers such as Equitas Small Finance Bank. AU Small Finance Bank would need to show recovery in loan growth and stable asset quality for its valuations to get a boost.
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