AU Small Finance Bank Q2: Cheaper Money Lifts Margin to 5.8%
AU Small Finance Bank's profit rose 53% in the September quarter to ₹858 crore. Unlike Kotak and IDFC First on the same day, its margin went up: the net interest margin rose to 5.8% from 5.5% as its cost of funds fell 43 basis points to 6.41%, which the bank lists first among the drivers. Deposits grew 28.6% and the gross loan portfolio 25.1%, and credit cost fell to 0.8% of assets from 1.2%.
The quarter in numbers
| Q2 FY27 | Value | Year-on-year | Source |
|---|---|---|---|
| Net interest income | ₹2,820 crore | +32% | [PR] |
| Net interest margin | 5.8% | from 5.5% | [PR] |
| Cost of funds | 6.41% | from 6.83% | [PR] |
| Core other income | ₹736 crore | +16% | [PR] |
| Operating expenses | ₹2,077 crore | +26% | [PR] |
| Core pre-provision profit | ₹1,480 crore | +31% | [PR] |
| Net provisions | ₹359 crore | −25% | [PR] |
| Profit after tax | ₹858 crore | +53% | [PR] |
| Return on assets / equity | 1.7% / 16.1% | from 1.4% / 12.4% | [PR] |
| Gross / net NPA | 1.99% / 0.81% | from 2.41% / 0.88% | [PR] |
Where the margin came from
The bank's own explanation of the 33-basis-point rise in margin lists a "Cost of funds improvement of 43 bps YoY to 6.41%" and a "27 bps YoY decline in gross Advance yields due to change in mix" ([PR]). It puts both items under what the margin was "led by"; the release does not say how much each contributed. (Its cost of funds covers all funding, not deposits alone; borrowings rose 38% to ₹14,239 crore.)
The deposit growth behind it:
- Total deposits grew 28.6% to ₹1,70,460 crore, which the bank calls "nearly 1.6x of the system growth" ([PR]).
- CASA deposits grew 29.1% to ₹50,289 crore, a CASA ratio of 29.5% ([PR]).
- Current-account deposits grew 55% to ₹11,693 crore ([PR]).
- "Stable deposits (CASA + Retail TD + Non-callable Bulk TD) form 79% of total deposits" ([PR]).
Moat and margin
Focus moat: the deposit franchise. Our reading: AU's moat-building is the job of turning branches into cheap, sticky deposits. In the quarter it added a net 183 touchpoints, including 45 liability branches, and now has 3,103 touchpoints in 21 states and 4 union territories ([PR]). The bank's cost of funds fell 43 basis points, but the release does not say how much of that came from the new branches (see the list of what the filings do not say above).
The cost side. That network is not free. Operating expenses grew 26% to ₹2,077 crore, which the bank says is "tracking business growth" ([PR]). Cost to assets, excluding the guarantee premium, fell only slightly, to 3.9% from 4.0% ([PR]).
Credit. Credit cost, including the guarantee premium, fell to 0.8% of average assets from 1.2% ([PR]). Unsecured loans (microfinance, credit cards and personal loans) grew 22.9%, a little slower than the secured book at 25.9% ([PR]). Collection efficiency on non-overdue microfinance loans was 99.6% ([PR]).
MoatSCORE: 5.90 (RED, first pass) on the Moat Screener ([MS]). The screener's red flag is a reason to read the bank's risks closely; this quarter's filing does not explain it.
The bear case
- A CASA ratio of 29.5% ([PR]) is below Kotak's 38.2% reported the same day ([KMB]), which Kotak ties to FCNR(B) term-deposit inflows; 70.5% of AU's deposits are not CASA (our arithmetic).
- Costs are heavy: cost to assets (excluding guarantee premium) of 3.9% ([PR]).
- Loan yields are falling: gross advance yields fell 27 bps on a change in mix ([PR]). Our reading: the margin gain depends on funding costs continuing to hold.
- Unsecured lending (microfinance, cards, personal loans) is still growing at 22.9% ([PR]).
- The screener flags AU RED ([MS]).
The case for
- Profit up 53% and return on equity up to 16.1% ([PR]).
- Margin up to 5.8%, which the bank attributes to a lower cost of funds ([PR]).
- Asset quality better: gross NPA 1.99% against 2.41% ([PR]).
- ICRA moved its outlook to Positive from Stable on its AA rating ([PR]).
What to watch
- Cost of funds: does the fall continue as the new branches mature?
- Cost to assets, still about 3.9%.
- Credit costs in microfinance and cards.
Sources
- [PR] AU Small Finance Bank, Q2 FY27 press release (NSE)
- [KMB] Kotak Mahindra Bank, Q2 FY27 media release (NSE)
- [MS] Moat & Margin, Moat Screener and How MoatSCORE works
Educational research, not investment advice. Every figure above is drawn from AU Small Finance Bank's own filings, read from the primary documents on 25 October 2026; derived figures are our arithmetic, labelled as such. MoatSCORE read live from the Moat Screener on 25 October 2026. No buy/sell recommendations, no price targets, no share prices. Moat & Margin is not a SEBI-registered Research Analyst or Investment Adviser.
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