AU Small Finance Bank plummets 9% as Credit Suisse says cost will rise

Credit Suisse expects the elevated operating expense (opex) to keep return on assets at 1.7 percent and return on equity at 17 percent.

Despite this, the bank is trading at almost four times the FY22 price to book and nearly 24 times price to earnings — this is at a significant premium to other large private banks having similar profitability or with smaller banks having a similar growth.

The price-to-book ratio compares a company's market value to its book value. The price-to-earnings (P/E) ratio is a measure of how much an investor is willing to pay to earn a unit of its earnings.

Bhavin Shah, Founder & Portfolio Manager, Sameeksha Capital said that they have chosen not to invest because they are not convinced about the asset quality lending practices at AU SFB and disclosure norms.

“We like the financial space but we tend to be very cautious in taking any risks with the asset quality and lending practices and that's why AU SFB never fit our bill. The valuations have been fancy because of the growth that the company has offered in the past, but we would continue to not look at it from an investment standpoint,” Shah added.

Shares of other private sector banks were also under pressure on Wednesday. While RBL Bank fell 4.78 percent, and Bandhan Bank fell 3.17 percent. The S&P BSE Private Bank and Nifty Private Bank index were down 1 percent each while the benchmarks S&P BSE Sensex and Nifty50 index saw a 0.6 percent decline.

RBL Bank's stock hit a 52-week low of Rs 74.15 on June 20, 2022. On June 11, the Reserve Bank of India (RBI) approved R Subramaniakumar's appointment as the managing director & chief executive officer (MD & CEO) of the bank.

Bandhan Bank, on the other hand, has corrected 23 percent from its 52-week high of Rs 349.50 on May 17, 2022.