720 is the target price for AU finance bank

AUBANK has historically maintained strong Return on Assets (RoAs). However, in FY24, this has decreased due to lower margins and increased credit costs. The merger with Fincare SFB will allow AUBANK to achieve sustainable growth, while Fincare’s stronger return ratios will enhance profitability, especially with improved operating leverage. After the merger, AUBANK will expand into high-yielding segments like Microfinance Institutions (MFI) and Gold loans, strengthening its position in Small Business Loans (SBL) and Housing. Additionally, Fincare’s presence in southern India complements AUBANK’s presence in the North, facilitating geographical expansion. Although the merger is expected to enhance Book Value (BV) and RoA, increased competition for deposits and integration costs may offset immediate benefits. However, RoA is projected to rise gradually to 1.7% by FY26E due to operational synergies and reduced funding costs. Moreover, Fincare’s rural focus will help AUBANK meet Priority Sector Lending (PSL) targets without hindering growth.The bank’s ability to execute effectively will be crucial in maintaining growth, asset quality, and delivering strong RoA. Given the management’s proven track record, we are confident in their ability to execute smoothly. Therefore, we recommend buying the stock with a target price of INR 720.