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AU Small Finance Bank More Richly Valued Than Some Leading Private Banks

AU Small Finance Bank set a price band of Rs 355-358 for its IPO.

(Left to Right)  Deepak Jain (Chief Financial Officer, AU Small Finance Bank Limited), Mr. Uttam Tibrewal (Executive Director, AU Small Finance Bank Limited), Mr. Kaizad Bharucha (HDFC Bank Limited), Mr. Sanjay Agarwal (MD & CEO, AU Small Finance Bank Limited), Mr. Raamdeo Agarwal (Motilal Oswal Investment Advisors Limited), Mr. Ravi Kapoor (Citigroup Global Markets India) and Mr. Mridul Mehta (ICICI Securities Limited) at the press conference of AU Small Finance Bank, Mumbai, India.
(Left to Right) Deepak Jain (Chief Financial Officer, AU Small Finance Bank Limited), Mr. Uttam Tibrewal (Executive Director, AU Small Finance Bank Limited), Mr. Kaizad Bharucha (HDFC Bank Limited), Mr. Sanjay Agarwal (MD & CEO, AU Small Finance Bank Limited), Mr. Raamdeo Agarwal (Motilal Oswal Investment Advisors Limited), Mr. Ravi Kapoor (Citigroup Global Markets India) and Mr. Mridul Mehta (ICICI Securities Limited) at the press conference of AU Small Finance Bank, Mumbai, India.

AU Small Finance Bank set a price band of Rs 355-358 for its initial public offer, which opens on June 28. The company is looking to raise Rs 1,912 crore through the issue which involves an offer for sale of 5.34 crore shares.

At the upper end of the price band, the company’s price-to-book – an indicator of the pricing of a company’s shares in relation to its net asset value – stands at 5.08, based on BloombergQuint’s calculations. This is significantly higher than the other small finance banks, which were listed recently, including Equitas Holdings Ltd at 2.33 and Ujjivan Financial Services at 2.26.

The ratio is also higher than some of the leading private banks like IndusInd Bank Ltd. at 4.28 and RBL Bank Ltd. at 4.47, as per information disclosed in AU Small Finance Bank’s IPO prospectus.

The higher valuation is justified, according to Chief Executive Officer and Managing Director Sanjay Agarwal, because AU Small Finance Bank is an asset-led bank unlike its peers.

ICICI Securities, HDFC Bank, Motilal Oswal Investment Advisors and Citigroup Global Markets India will manage the issue.

AU was launched in 1996 as a retail-focused non-banking finance company (NBFC) based in Jaipur. The company has diversified its lending portfolio since its conversion to a small finance bank, adding a variety of options including gold loans and agriculture credit to the original three business verticals–vehicle finance, micro, small and medium enterprises (MSME) loans and small and medium enterprises (SME) loans.

On December 20, 2016 the company became the first asset-led NBFC to get a small finance banking license from the Reserve Bank of India along with nine other such entities.

After beginning operations two months ago, the bank has collected deposits worth Rs 600 crore, said Sumit Madan, head of branch banking. Of the total, only Rs 180 crore was through bulk deposits, while the remaining was retail, he said.

As of March 31, 2017, the company’s gross assets under management grew 30 percent to Rs 10,734 crore and its total disbursements rose 19 percent to Rs 6730.46 crore compared to the previous year. The company has a total of 2.8 lakh active loan accounts.

The bank’s asset quality worsened significantly after its transition from a non-banking finance company (NBFC). As on March 31, it had total bad loans worth Rs 107.2 crore, up from Rs 37 crore in the previous year. This, Agarwal said, was on account of the change in the classification of a non-performing asset for AU, once it became a small finance bank.

According to the RBI’s norms, an NBFC must classify a loan as non performing if interest or principal payments are overdue for a period of 150 days. For small finance banks, this number is 120 days.

“For expansion, brick and mortar model may not be so necessary and we need to figure out whether it is a business correspondent model, brick and mortar or digital which is good for us,” said Agarwal. The bank is also planning to have a total of 500 branches by 2018 from the current 301 spread across 10 states and one union territory in India.