AU Small Finance Bank Navigates Q2 FY26 with Strategic Clarity and Resilient Performance

AU Small Finance Bank Limited has reported a resilient performance for the second quarter of Financial Year 2026 (Q2 FY26), demonstrating strategic clarity amidst a mixed economic sentiment. The bank achieved a 6% year-on-year (YoY) growth in Profit After Tax (PAT) for the first half of FY26 (H1 FY26), reaching ₹1,142 crore. Total income for Q2 FY26 stood at ₹2,857 crore, driven by a Net Interest Income (NII) of ₹2,144 crore and other income of ₹713 crore. This performance underscores the bank's ability to adapt and grow, particularly with the significant milestone of receiving in-principle approval from the RBI to transition into a universal bank.

The bank's core businesses showed strong momentum, with the deposit book growing by an impressive 21% YoY and 3.8% quarter-on-quarter (QoQ), reaching ₹1,32,509 crore. This growth is nearly double the banking system's average, reflecting the increasing strength of its branch banking franchise. The Cost of Funds (CoF) declined by 25 basis points (bps) to 6.83% in Q2 FY26, contributing to a sequential improvement in the Net Interest Margin (NIM) by 5 bps to 5.5%. While the overall loan portfolio grew by 17% YoY, the secured segments, including Retail Secured Assets and Commercial Banking, were the primary drivers, growing by 22% YoY. The unsecured portfolio, however, experienced a degrowth of 23% YoY, with credit cards and microfinance segments undergoing calibration.

Management highlighted that the universal banking license is a pivotal development, expected to significantly enhance trust and brand acceptance, optimize the cost of funds, and provide wider access to deposit sources. This transition, with an 18-month timeline, is not anticipated to incur additional operating expenses for technology or compliance, as the bank has proactively invested in its platforms. The bank's focus remains on expanding its distribution footprint, particularly in new geographies like Andhra Pradesh, Karnataka, Tamil Nadu, and West Bengal, to capture market share. Digital engagement through platforms like AU0101 continues to deepen, with 35.4 Lacs registered users and 15.4 Lacs monthly active users, driving stickiness and enabling contextual cross-sell.

Asset quality saw sequential improvement, with slippages reducing by 12% QoQ to ₹908 crore. Credit costs also declined sequentially, and the bank expects them to normalize in the second half of the year, guiding for a full-year credit cost within 1% of average total assets. The Gross Non-Performing Assets (GNPA) marginally declined to 2.41% from 2.47% in Q1 FY26. The bank's Provisioning Coverage Ratio (PCR) stood at 84%. The management's disciplined approach to growth, coupled with strategic investments in technology and distribution, positions AU Small Finance Bank for sustained performance. The bank's robust capital adequacy, with a CRAR of 20.0% and Tier 1 ratio of 16.9%, further strengthens its ability to capitalize on emerging opportunities.

AU Small Finance Bank's Q2 FY26 performance reflects a period of strategic clarity and disciplined execution. The universal banking license marks a new chapter, enabling broader market acceptance and enhanced operational flexibility. With a strong focus on granular deposits, expanding distribution, and leveraging digital capabilities, the bank is well-positioned to continue its growth trajectory and deliver consistent value to its stakeholders.