AU Small Finance Bank (AUSFB) — one of India’s most prominent small finance banks — has continued its steady growth trajectory despite near-term profitability pressures. Citi’s latest Q2 update notes that gross advances rose 5.3% quarter-on-quarter and 22.4% year-on-year, outperforming its internal expectations. The report also points to moderated slippages from elevated Q1 levels and a gradual normalization in credit costs during the second half of FY26.

Citi’s analysis underscores that AUSFB’s lending book continues to expand at a healthy pace, with gross advances up 22.4% YoY and 5.3% QoQ. This comes slightly ahead of expectations, suggesting sustained traction in the bank’s retail and MSME segments. Moreover, AUM growth of 17% YoY (versus Citi’s 16% estimate) implies resilience in demand despite rising funding costs.

The balance sheet mix remains retail-heavy, supported by consistent traction in vehicle and small business loans — segments where the bank maintains established credit assessment models and geographic diversification advantages.

Citi cautions that return on assets (RoA) could remain under near-term pressure owing to a lack of treasury gains and elevated credit costs. However, it expects normalization in 2HFY26 as provisions taper and operating efficiency offsets some of the drag. The bank’s cost-to-income ratio remains in a healthy range, aided by digital efficiency and expansion in high-yield segments.

⚠️ Citi notes that treasury income volatility and limited non-interest revenue are likely temporary drags. Sustainable improvement in RoA hinges on steady disbursement volumes and a pickup in CASA ratios over the next few quarters.

Slippages, which had spiked in Q1FY26, are now showing clear moderation trends according to Citi. The note mentions early signs of stabilization across key buckets, particularly in small business loans and vehicle finance. Collection efficiency remains above 98%, reinforcing Citi’s positive stance on asset quality improvement.

💳 Credit costs are projected around 1.8% for FY26 but expected to normalize in the second half as recoveries strengthen and restructured assets wind down. Citi’s model assumes a steady-state credit cost range of 1.4–1.5%, aligning with peers in the small finance banking space.

AUSFB’s strategy of balancing high-yield small business loans with secured retail products continues to provide a buffer against sectoral volatility. Citi appreciates the management’s disciplined approach to growth and asset diversification, which has helped the bank outperform sector averages on loan growth and maintain stable deposit traction.

💡 The key investor question now is the pace of RoA recovery and how much credit cost normalization can offset any drag from lower treasury gains in the coming quarters.

✅ Citi’s assessment positions AU Small Finance Bank as a structurally strong player within the small finance banking space, with above-industry growth and gradually improving credit discipline. While short-term RoA remains pressured, the medium-term normalization story is intact.

✅ Slippage moderation, stable collection efficiency, and improving retail traction make the Q2 performance more reassuring than headline numbers might imply. Investors should monitor treasury income trends and funding-cost movements into Q3 and Q4. 

Explore detailed equity research coverage and expert insights at Indian-Share-Tips.com, which is a SEBI Registered Advisory Services.