Analyst's Diary: Decoding AU Small Finance Bank's success

The unique market position and financial performance of AU Small Finance Bank have captured investors' attention lately. With a market capitalisation of Rs 42,500 crore as of February 1, 2024, the bank stands as the sole large-cap small finance bank in India, having nearly tripled its stock price since its listing in 2017. Further, the bank has achieved an industry-leading growth rate among small finance banks (SFBs), with an annual growth rate of 34 and 54 per cent in loan advances and deposits, respectively, in the last five years. Here, we explore the factors contributing to AU's tag of becoming one of the best-performing SFBs in India. Sticking to its guns In FY17, 10 NBFCs (non-bank financial companies) were granted licenses to transition into SFBs. Of these, only two institutions, including AU Small Finance Bank, did not engage in microfinance lending. Before 2017, AU Small Finance Bank operated as an NBFC. The bank has chosen to stay away from microfinance lending and continues to focus on its core competency, i.e., vehicle loans, which has been its forte for the last 21 years. This move proved beneficial for AU. Given that microfinance lending involves providing small, unsecured loans to un