Strong Profit and Deposit Growth Fail to Reassure Investors as Higher Slippages and Valuation Concerns Weigh on Sentiment; Emkay Retains Reduce Rating While JM Financial Maintains Buy
Shares of AU Small Finance Bank came under sharp selling pressure on Monday, October 26, 2026, falling more than 9% intraday despite the lender reporting strong year-on-year growth in profit, net interest income and deposits for the September quarter of FY27. Investors appeared concerned about rising sequential loan slippages, limited scope for further improvement in funding costs and the bank’s valuation.
The stock touched an intraday low of ₹845.65 on the BSE, declining as much as 9.45%. At around 9:53 AM, it was trading at ₹880.75, down 5.70%, with approximately three million shares changing hands across the BSE and NSE. Later market data cited in the report showed the stock at ₹871, down ₹61.90, or 6.64%, highlighting continued volatility during the session.
The contrasting reactions from brokerages reflected the balance between the bank’s strong business growth and concerns about earnings quality, credit costs and the sustainability of profitability in a potentially changing interest-rate environment.
Q2 FY27 Results: Profit Rises 53% to ₹858 Crore
AU Small Finance Bank reported a 53% year-on-year increase in profit after tax (PAT) to ₹858 crore for the September quarter, according to the figures cited in the report.
The bank also delivered strong growth in its core lending income. Net interest income (NII), representing the difference between interest earned on loans and investments and interest paid on deposits and borrowings, increased 32% year-on-year to ₹2,820 crore.
Net interest margin (NIM) improved by 33 basis points year-on-year to 5.8%, indicating that the bank maintained a healthy spread between its interest-earning assets and funding costs during the quarter.
The bank reported an annualised return on assets (RoA) of 1.7% and return on equity (RoE) of 16.1%. These indicators are important measures of a lender’s ability to generate profits from its assets and shareholders’ capital.
Despite the strong headline numbers, the market reaction suggests investors were looking beyond year-on-year growth to assess the quality and sustainability of future earnings.
Deposit Growth Remains Strong
The bank’s deposit franchise continued to expand during the quarter, providing an important source of funding for its lending operations.
Total deposits stood at ₹1,70,460 crore at the end of September 2026, representing year-on-year growth of 28.6%. According to the reported figures, this was approximately 1.6 times the growth recorded by the banking system.
Current Account and Savings Account (CASA) deposits increased 29% year-on-year to ₹50,289 crore.
CASA deposits are particularly important because they can provide banks with a relatively lower-cost source of funding compared with certain term deposits and wholesale borrowing arrangements. Sustained growth in these balances can help lenders manage their cost of funds and support lending margins.
However, rapid deposit growth does not automatically translate into higher profitability. Banks must balance deposit mobilisation costs, loan pricing, asset quality and capital requirements to maintain sustainable returns.
For AU Small Finance Bank, the next phase of growth will depend partly on its ability to preserve deposit momentum without materially increasing funding costs.
Limited Scope for Further Funding Cost Reduction
Management indicated that the scope for additional reductions in the cost of funds may be limited because of tight liquidity conditions. As a result, NIMs are expected to remain broadly rangebound, according to the report.
This is a key variable for investors because net interest margins directly influence a bank’s core earnings capacity.
If deposit costs remain elevated while competition restricts the ability to increase lending rates, margins may face pressure. Conversely, a favourable mix of deposits, disciplined loan pricing and improved asset yields could help offset higher funding expenses.
The interest-rate environment will also influence the trajectory. Changes in policy rates and market borrowing costs can affect banks differently depending on the repricing profile of their assets and liabilities.
Investors will therefore be watching whether AU Small Finance Bank can sustain its NIM near current levels while continuing to grow its loan book.
Higher Sequential Slippages Raise Asset Quality Questions
Asset quality was another area of focus following the results.
According to the report, gross and net slippages increased sequentially by 24 basis points and 18 basis points, respectively. The rise was attributed partly to seasonal tractor billing.
However, both measures improved on a year-on-year basis, with gross slippages declining by 70 basis points and net slippages falling by 42 basis points.
Slippages refer to loans that deteriorate in repayment status and move into a non-performing category. A rise in slippages can signal emerging stress within a loan portfolio, although seasonal factors and changes in the portfolio mix can also influence quarterly movements.
The bank’s credit costs stood at approximately 73–74 basis points in the first half of FY27, compared with its full-year guidance of around 90 basis points. Management reiterated a cross-cycle credit cost expectation of 90–100 basis points and said it remained watchful for signs of emerging stress.
The unsecured portfolio was described as stable, while collection efficiency remained strong at 99%.
These indicators offer some reassurance, but investors will need to assess whether the recent sequential increase in slippages proves temporary or develops into a more persistent trend.
Emkay Global Retains Reduce Rating With ₹950 Target
Brokerage firm Emkay Global maintained its ‘REDUCE’ rating on AU Small Finance Bank, retaining its target price at ₹950.
Emkay reportedly estimated that the bank’s profit after tax missed its expectations by approximately 2%, primarily because of higher operating expenses. These expenses were partly offset by lower-than-expected provisions, which were reported to be around 10% below the brokerage’s estimates.
The brokerage also highlighted spending associated with branch expansion and the establishment of more than 100 asset centres.
Expansion can strengthen a bank’s long-term distribution network and improve its ability to reach new customers. However, the associated costs may weigh on near-term profitability before the benefits of the investment become fully visible.
Emkay expects the bank’s return on assets to improve to approximately 1.7–1.8% over FY27–FY29, compared with 1.5% in FY26.
Despite this expected improvement, the brokerage believes the stock’s valuation leaves limited room for error amid macroeconomic uncertainty. Its valuation assessment of approximately 2.5 times estimated September 2028 adjusted book value was a key reason for maintaining the cautious rating.
The central concern is not necessarily the bank’s growth prospects, but whether the current share price adequately compensates investors for the risks associated with asset quality, funding costs and the broader economic environment.
JM Financial Maintains Buy but Cuts Target Price
JM Financial adopted a more constructive position, maintaining its ‘BUY’ rating while reducing its target price to ₹1,110 from ₹1,165.
The brokerage acknowledged AU Small Finance Bank’s strong growth performance and noted that credit costs remained comfortably within management’s guidance.
JM Financial forecast average RoA and RoE of approximately 1.7% and 17%, respectively, over FY27–FY29.
However, it identified two important variables that investors should monitor: the trajectory of net interest margins in a rising-rate environment and the bank’s dependence on insurance-related income.
According to the report, insurance income accounted for approximately 14% of the bank’s profit before tax, compared with around 5% for the brokerage’s broader banking coverage.
A relatively high contribution from insurance-related income can support profitability, but it also means investors should examine the sustainability and composition of earnings beyond traditional lending activities.
JM Financial revised its valuation multiple to 3.0 times estimated FY28 price-to-book value from 3.1 times previously, contributing to the lower target price.
The difference between the two brokerage views illustrates how assumptions about future profitability, valuation multiples and risk exposure can lead analysts to reach different conclusions even when assessing the same financial results.
Why Did the Stock Fall Despite Strong Earnings?
The decline highlights the difference between strong reported growth and market expectations.
A company can deliver substantial year-on-year profit growth and still see its shares fall if investors believe that the results are weaker than expected, future growth may slow, or the current valuation already reflects much of the anticipated improvement.
In AU Small Finance Bank’s case, several factors may have contributed to the negative reaction:
1. Higher operating expenses: Branch expansion and investment in asset centres may support future growth but can put pressure on near-term earnings.
2. Sequential increase in slippages: Although asset quality indicators improved year-on-year, the rise in slippages compared with the previous quarter attracted attention.
3. Limited margin improvement: Management’s indication that further cost-of-funds reductions may be difficult could restrict additional NIM expansion.
4. Valuation concerns: Emkay believes the stock offers a limited margin of safety at current valuation levels, particularly given macroeconomic uncertainty.
5. Uncertainty over earnings composition: JM Financial’s comments about insurance income highlight the importance of understanding how much profitability comes from core lending and how much depends on other income sources.
The share-price decline does not, by itself, establish that the bank’s long-term fundamentals have deteriorated. It does, however, show that investors are reassessing the balance between growth, risk and valuation.
What Investors Should Monitor Next
The sustainability of AU Small Finance Bank’s earnings growth will depend on several developments over the coming quarters.
First, investors should track credit costs and loan slippages to determine whether the sequential deterioration was primarily seasonal or reflects a broader change in borrower behaviour.
Second, deposit growth and funding costs will be important in determining whether the bank can protect its NIM as competition for deposits continues.
Third, operating expenses need to be assessed against the benefits of network expansion. If investments translate into stronger customer acquisition, loan growth and operating leverage, the current spending could support future profitability. If expense growth remains elevated without a corresponding improvement in revenue, earnings could face pressure.
Finally, valuation will remain central to the investment debate. Emkay’s ₹950 target and JM Financial’s ₹1,110 target reflect different assumptions about the bank’s future performance and the valuation investors may be willing to assign to it.
These are brokerage estimates rather than guaranteed future prices, and actual performance may differ materially.
Market Outlook
AU Small Finance Bank’s September-quarter performance demonstrated strong growth in profit, net interest income and deposits. Nevertheless, the sharp share-price decline indicates that investors remain concerned about the sustainability of margins, sequential loan slippages, operating expenses and valuation.
The brokerage outlook remains divided. Emkay Global has retained a ‘REDUCE’ rating with a ₹950 target price, citing limited valuation comfort amid macroeconomic uncertainty. JM Financial continues to recommend ‘BUY’, with a revised target price of ₹1,110, while acknowledging risks related to margins and the contribution of insurance income.
Going forward, the bank’s ability to maintain deposit growth, control credit costs and translate expansion spending into stronger operating performance will be critical. Investors should also watch how funding costs and interest-rate movements affect margins.
For existing shareholders, the results warrant a review of the bank’s asset quality, earnings mix and valuation against their investment horizon. Prospective investors may prefer to assess these factors carefully rather than basing decisions solely on the reported profit growth or the sharp fall in the share price.