The thriller inventory from Jaipur main India’s financial institution index in 2025

Stamford Bridge soccer stadium, London.

As the ultimate whistle blew on a fiery draw between Chelsea and Tottenham Hotspur, a raucous cheer erupted from an unlikely nook of the group. It wasn’t the match end result they had been celebrating, however one of the vital astonishing moments in trendy sporting historical past—lowly Leicester Metropolis, which had narrowly staved off relegation within the earlier season, was topped Premier League champions for the primary time of their 132-year historical past.

Leicester Metropolis had earned a promotion to the highest tier in English soccer simply two years earlier. Originally of the 2015-16 season, bookmakers had given the workforce odds of 5,000-1 for successful the title. For context, the chances of Elvis Presley being discovered alive was 2000-1. In different phrases, Leicester’s probabilities of being topped the champions of English soccer had been decrease than Elvis being discovered alive.

And but, the unthinkable had occurred. The unheralded workforce with a modest wage invoice had trumped the Premier League powerhouses like Manchester Metropolis, Manchester United, Arsenal and Chelsea.

Rank outsiders rising on high all the time leaves behind a path of heartbreak, euphoria and bewilderment. To not point out a scramble for explanations.

One thing comparable is underway on Dalal Avenue, the place the unlikeliest of candidates has emerged as Nifty Financial institution Index’s high performer this 12 months—AU Small Finance Financial institution. It not solely has the smallest weightage within the grouping but additionally the one one and not using a common banking licence. As but.

However because the lender’s June quarter (Q1) present suggests, whereas scale isn’t a prerequisite for sturdy execution, the market might be rewarding promise greater than efficiency at this juncture.

The Edge

Comparability could be the thief of pleasure, however within the markets at the very least, It’s usually the start line of conviction. AU Small Finance Financial institution posted an honest displaying in Q1FY26, with internet revenue climbing 16% on-year to ₹581 crore on the again of an 18% bounce in internet complete revenue. However it is just when set towards the backdrop of the sector’s leaders that its outperformance in lots of essential areas stands out.

Take credit score development, for instance.

At a time when the sector is dealing with sturdy headwinds within the type of slowing credit score enlargement, the Jaipur-based firm posted a mortgage development of 18% over the year-ago quarter. To place issues in perspective, the nation’s largest non-public sector lender HDFC Financial institution’s gross advances inched up 6.7% in Q1. Whereas that is fairly comprehensible, on condition that it has been consciously moderating mortgage development to deliver down its credit-deposit (CD) ratio nearer to ranges earlier than its merger with HDFC, even ICICI Financial institution, arguably the Avenue’s favorite non-public sector lender presently, reported home credit score development of 12%.

AU Small Finance Financial institution’s administration has reiterated its goal of reaching mortgage development of two to 2.5-times the nominal GDP development.

System credit score has been sputtering because the second half of FY25 amid macroeconomic headwinds and a marked slowdown in home consumption. Whereas FY26 is displaying incipient indicators of a revival in consumption, credit score demand stays muted. Based on information from the Reserve Financial institution of India (RBI), system credit score development softened from 14-16% within the year-ago quarter to 11-13% in second half of FY25, and additional to about Sept. 11% in Q1 this 12 months.

Related is the case with deposits.

Banks are discovering it robust to mobilise deposits in an atmosphere of low rates of interest, with traders channeling their financial savings in direction of different avenues like fairness markets. System deposit development slowed to 10.6% in FY25 from 13% within the earlier monetary 12 months.

On this context, AU Small Finance Financial institution’s deposit development of 31% in Q1, in comparison with the year-ago interval, stands out. Extra so, given the 16.2% deposit development of HDFC Financial institution and 12.8% of ICICI Financial institution.

That stated, evaluating a small finance financial institution with the sectoral behemoths would elicit a derisive snort from statistical puritans. In any case, the small financial institution’s deposit base of ₹1.28 trillion operates in a unique mathematical universe when in comparison with HDFC Financial institution’s ₹27.64 trillion and ICICI Financial institution’s ₹16.08 trillion.

However even under-the-hood metrics present an edge for AU Small Finance Financial institution. The agency’s internet curiosity margin (NIM)—a key measure of banks’ core profitability—is greater than the business stalwarts. NIM is a measure of the distinction between the curiosity earned by a financial institution on its loans and securities and what it pays out to depositors.

The small financial institution’s earnings per share (EPS) development— arguably an important yardstick from a inventory market perspective—stood at 15.2% in Q1, in comparison with 11.4% for HDFC Financial institution and 13.8% for ICICI Financial institution.

Equally, its pre-provision working revenue (PPoP), which is a key monetary metric representing a financial institution’s core working efficiency earlier than accounting for provisions for potential mortgage losses, surged 38% on-year, in comparison with 11% for ICICI Financial institution.

The small financial institution’s earnings per share (EPS) development— arguably an important yardstick from a inventory market perspective—stood at 15.2% in Q1, in comparison with 11.4% for HDFC Financial institution and 13.8% for ICICI Financial institution.

Phrases of Warning

Nevertheless, this isn’t to counsel that the Q1 numbers had been an all-round success. As an illustration, NIMs dropped to five.4% from 6% within the corresponding quarter of the earlier monetary 12 months, in tandem with different lenders grappling with the problem of declining rates of interest on loans and stickier charges on deposits.

Extra worryingly, AU Small Finance Financial institution’s asset high quality has proven a marked deterioration, albeit in a seasonally weak quarter. Gross non-performing belongings (GNPA) ratio rose to 2.47% in Q1 FY26 in comparison with 1.78% within the year-ago quarter, whereas internet NPA ratio climbed to 0.88% from 0.63% in the identical interval.

The micro finance phase (MFI) can be seeing stress, with GNPA ratio at 4.1%.

“The projected credit score price for MFI in FY26 has been revised upward, with the phase now anticipated to incur a 5% credit score price in comparison with the sooner steerage of three%,” Centrum Institutional Equities acknowledged in a notice.

Other than decrease assortment effectivity within the MFI phase, the administration has additionally flagged considerations within the mortgage e book within the southern states (largely belonging to Fincare Small Finance Financial institution, which was merged into AU Small Finance Financial institution in April 2024), in addition to some stress in its bank cards portfolio.

“On unsecured retail loans, restoration in asset high quality appears to be delayed than earlier expectations, however we appear to have higher visibility on 2H FY26. Administration has highlighted stress in sure pockets of secured retail companies (mortgages in southern India and small business automobiles); we’re not sure concerning the eventual credit score price consequence of those points,” analysts at Kotak Institutional Equities famous. “We’re not sure if asset high quality is at its finest for the financial institution. We’re additionally not sure if the broader working atmosphere is beneficial sufficient for the financial institution to ship sturdy mortgage development,” it added.

Whereas some analyst commentary is understandably cautious, the inventory’s chart-topping 30% rally this 12 months up to now reveals a peculiarity of the market—it’s a forward-looking mechanism, which assigns a larger weightage to what an organization would possibly develop into than what it’s presently.

And that is the place AU Small Finance Financial institution could be punching above its weight.

God of Small Issues

Small Finance Banks (SFBs) had been launched in India in 2014 as a definite class of lenders aimed toward deepening monetary inclusion. In contrast to funds banks, SFBs are permitted to each settle for deposits and provide loans, with a give attention to serving segments historically under-represented in formal banking, like small and marginal farmers, micro and small enterprises (MSMEs), and low-income households.

As per guidelines, SFBs must preserve at the very least 75% of their loans under ₹25 lakh and at the very least 25% of their branches have to be in rural areas that lack banking companies. That is in distinction to common banks, which don’t have any such restrictions, apart from making certain that 40% of their loans are given to precedence sectors like agriculture, MSME and so on.

Common banks cater to a broader vary of consumers, together with massive corporates and authorities entities. They provide a variety of companies like funding banking, company banking, amongst others. For entities engaged within the lending enterprise, securing an common banking licence is seen as the head of economic evolution, marking their elevation from area of interest operations to a coveted seat on the massive desk.

In August 2016, the RBI launched the ‘on faucet’ licensing coverage for common banks, permitting eligible entities like SFBs to use for a banking licence at any time. The candidates have to fulfill quite a few stringent standards, together with these associated to minimal internet price, operational parameters, capital adequacy, NPA ranges, board construction and others.

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AU Small Finance Financial institution, which started operations as AU Financiers in Jaipur in 1996 and have become an SFB in 2017, utilized for a common banking licence on 3 September final 12 months. The inventory, which was buying and selling within the vary of round ₹600- ₹640 in August 2024, surged to ₹750 ranges in September after its utility was filed, earlier than succumbing to revenue reserving.

After a quiet few months, the counter resumed its upward trajectory April 2025 onwards. A rule of thumb in equities is that markets transfer first, information follows later. Is that this what’s transpiring within the inventory presently, particularly on condition that the positives and negatives appear to be evenly matched in its quarterly numbers?

Licence to rally

We consider the rally is basically pushed by optimism round its utility for a common banking licence,” Asutosh Mishra, head of analysis at Ashika Institutional Fairness, advised Mint. “If accepted, the licence would mark a strategic milestone—enabling the financial institution to broaden its product choices, diversify its stability sheet, and considerably decrease its price of funds,” he added.

The market, due to this fact, is pricing within the transformational potential of AU Small Finance Financial institution changing into a full-service financial institution.

The financial institution declined to remark for this story. Nevertheless, at its earnings name earlier this month, Sanjay Agarwal, the corporate’s founder, managing director and chief govt officer, indicated {that a} determination on its licence is predicted quickly. “I consider that this 12 months, the choice must be made. I’m unsure what determination…however it’s already 10 months since our utility,” he advised analysts.

He additionally exuded confidence concerning the firm’s margin stress stabilising from Q3 onwards, on condition that round two-thirds of its portfolio is mounted price. Stress within the MFI and bank cards segments might ease from subsequent 12 months, the founder added.

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Curiously, one other common banking licence contender, Ujjivan SFB, which submitted its utility in February 2025, too is seeing an analogous rally on the bourses, with its inventory surging over 35% year-to-date.

Second-guessing the regulator is a harmful recreation, however at an occasion within the nationwide capital final week, RBI governor Sanjay Malhotra reiterated the central financial institution’s objection to permitting corporates acquire banking licences, citing “battle of curiosity”.

Market watchers say this will increase the probabilities of standalone SFBs acquiring the coveted banking licence. Nevertheless, it is very important notice that no licenses have been issued but since RBI introduced the ‘on faucet’ licensing coverage in August 2016. The final time common banking permits had been issued was in 2015, when IDFC and Bandhan Financial institution acquired the go forward.

Final week, RBI governor Sanjay Malhotra reiterated the central financial institution’s objection to permitting corporates acquire banking licences. Market watchers say this will increase the probabilities of standalone SFBs acquiring the coveted licence.

‘Promising franchise’

Some analysts additionally preserve that the funding thesis for smaller lenders goes past whether or not they can safe a banking licence or not.

“We consider small and mid-sized banks are well-positioned to outperform, particularly within the evolving rate of interest atmosphere,” Ashika Institutional Fairness’s Mishra stated. “These banks usually have the next reliance on time period deposits, and with RBI’s latest pivot in direction of easing—via each price cuts and liquidity infusion—they stand to profit extra meaningfully from decrease funding prices as their deposit base will get repriced. Whereas inventory choice stays vital, the macro tailwinds clearly favour nimble, deposit-sensitive lenders on this part,” he added.

Nevertheless, there isn’t a denying the anticipation which has constructed up in counters like AU Small Finance Financial institution.

Motilal Oswal expects the financial institution to keep up its development management within the sector. That stated, the home brokerage home has slashed its earnings estimate by 0.7% and three.8% for FY26 and FY27, respectively.

“After a pointy latest outperformance, we see restricted near-term catalysts for the inventory. Nevertheless, we consider that AU Small Finance Financial institution has the potential to emerge as a promising franchise over the medium time period, particularly after it secures the common financial institution license,” it acknowledged in a notice.

Brief-term exuberance could also be sufficient to elevate a inventory, however solely long-term execution cements an organization’s place on the desk. Banking licence or not, that is what’s going to decide its subsequent part of development.