AU SFB shares gain 2% as Q3 profit rises 26% YoY. Should you buy, sell or hold?

Shares of AU Small Finance Bank (AU SFB) gained over 2% to hit a day’s high of Rs 1,027 on the BSE on Wednesday after the lender delivered a strong December-quarter performance. Net profit rose 26% year-on-year to Rs 668 crore, compared with Rs 528 crore in the same period last year.

The midcap lender also posted healthy growth in its core earnings, with net interest income (NII) rising 16% YoY to Rs 2,341 crore in Q3FY26, from Rs 2,023 crore in the corresponding quarter of the previous financial year.

Profitability was further supported by margin expansion. The bank’s net interest margin (NIM) widened by 25 basis points sequentially to 5.7% in the December quarter, up from 5.5% in Q2FY26.

Non-interest income remained a key contributor to earnings. Other income rose 17% YoY to Rs 724 crore, compared with Rs 618 crore in Q3FY25, driven by higher fee income and increased traction in third-party product distribution. On the cost front, total operating expenses, excluding an exceptional item of Rs 1,830 crore, grew 27% YoY to Rs 1,436 crore.

Deposits remained robust, with total deposits rising 23.3% YoY and 4.5% QoQ to Rs 1,38,415 crore. The CASA ratio remained stable at 29% in December 2025, unchanged from September 2025. CASA deposits grew 16% YoY, supported by a sharp 31% YoY rise in current deposits to Rs 7,404 crore and a 13% YoY increase in savings deposits to Rs 32,543 crore. The bank highlighted strong momentum in CASA acquisition, noting that monthly CASA account openings hit a run rate of 1 lakh for the first time in December 2025.

Asset quality continued to improve sequentially. Gross NPA declined to 2.30% from 2.41% in Q2FY26, while net NPA remained stable at 0.88%. The provision coverage ratio, including technical write-offs, stood healthy at 83%.Sensex, Nifty today: Catch all the LIVE stock market action here What should investors do?Motilal Oswal has reiterated its Buy rating on AU Small Finance Bank, assigning a target price of Rs 1,250 per share, an upside potential of 25% from the last closing price.

According to the brokerage, AU Small Finance Bank delivered a robust quarterly performance, supported by strong loan growth, a meaningful expansion in net interest margins, and a sharp moderation in credit costs. Margin improvement was driven by a continued shift towards a higher-yielding asset mix, along with benefits from deposit repricing.

Motilal Oswal noted that growth remains among the strongest in the industry, and with higher-yield segments expected to scale up further, the brokerage remains positive on the bank’s underlying profitability profile. While operating expenses edged up during the quarter, management continues to maintain guidance of a cost-to-income ratio of below 60%.

Factoring in these positives, Motilal Oswal has slightly raised its earnings estimates and expects the bank to deliver a PAT CAGR of 35% over FY27–FY28E. The brokerage expects AU Small Finance Bank to generate best-in-class earnings growth over the coming years and continues to rank it as its top pick among mid-size private banks.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)