AU Small Finance Bank: Morgan Stanley Sees Over 30% Upside, Hikes Target Price to Rs 1,000

Morgan Stanley has raised its target price on AU Small Finance Bank Ltd., citing confidence in the lender’s growth prospects through fiscal year 2027.

In its latest note, Morgan Stanley has raised its target price to Rs 1,000 from Rs. 860 while maintaining an ‘overweight’ rating on the scrip. The stock is currently trading Rs 745, which suggests a sizable upside of over 30%.

Stronger Growth Prospects in FY26 and FY27

The firm believes AU Small Finance Bank is poised for stronger growth in the second half of FY26. They expect the momentum to increase further going into FY27.

“The setup post Q2 appears strong—NIM should trough, loan growth should accelerate, and credit cost should moderate,” the note said.

Margin Pressure to Ease

Margin pressure has been a common problem for AU Small Finance Bank in recent quarters, especially amid high interest rates and high-cost deposits.

However, Morgan Stanley believes these overhangs should come off soon, with the lender likely to see a higher net interest margin, potentially rising 30-50 basis points over the next six quarters.

This is directly linked to an easing rate cut cycle enforced by the Reserve Bank of India in this calendar year.

Improving Loan Growth and Credit Costs

The note also says that loan growth for the lender could improve due to the improving macroeconomic conditions as well as RBI’s rate cuts seeping into the credit cycle. AU Small Finance Bank is in a position to leverage from this development due to its diverse product offerings, including a digital franchise in southern India.

As far as credit costs are concerned, the notes forecasts it at around 1.1% of assets, with a further relief expected in FY27. This is because of the fact that credit costs tied to secured loans have stabilised while costs on unsecured lending also remains manageable.

Investment Strategy for AU Small Finance Bank

For investors looking to capitalize on the potential upside of AU Small Finance Bank, it’s essential to consider the overall market conditions and the banking sector’s performance.

With the RBI’s rate cuts expected to boost loan growth and improve credit costs, AU Small Finance Bank is well-positioned to benefit from these developments.

However, investors should also keep an eye on the lender’s margin pressure and the overall economic conditions, which could impact the stock’s performance.

Conclusion

In conclusion, Morgan Stanley’s target price hike for AU Small Finance Bank suggests a significant upside potential for the stock. With the lender’s growth prospects, improving loan growth, and easing margin pressure, investors may consider adding AU Small Finance Bank to their portfolio.

However, it’s crucial to conduct thorough research and consider individual financial goals and risk tolerance before making any investment decisions.

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