AU Bank Q3 Results: Profit Soars 26%, NIM Improves to 5.7%

Introduction

AU Small Finance Bank announced a robust financial performance for the third quarter of fiscal year 2026, reporting a 26.3% year-on-year increase in net profit. For the quarter ending December 31, 2025, the bank's profit after tax stood at ₹668 crore, up from ₹528.4 crore in the same period last year. The strong results were driven by healthy balance sheet expansion, stable asset quality, and improved profitability metrics, reinforcing the bank's solid growth trajectory in a competitive market.

Stellar Quarterly Financials

The bank's core income streams demonstrated significant strength. Net Interest Income (NII) grew by 16% year-on-year to ₹2,341 crore, supported by strong growth in the loan portfolio and effective pricing strategies. Total income for the quarter rose by over 15% to ₹5,451 crore. A key highlight was the sequential improvement in Net Interest Margin (NIM), which expanded by 25 basis points to 5.7%. This improvement was attributed to a better cost of funds and an efficient asset mix. The pre-provisioning operating profit (PPoP) also saw a modest 3% year-on-year increase, reflecting disciplined operational leverage amid strategic investments in technology and distribution.

Key Performance Metrics for Q3 FY26

Robust Balance Sheet Expansion

AU Small Finance Bank continued to witness strong growth in its core business segments. The gross loan portfolio expanded by 19.3% year-on-year to reach approximately ₹1.29 trillion. This growth was broad-based, with the secured asset portfolio, excluding unsecured businesses, growing at an even faster rate of 23.4% YoY. On the liabilities side, total deposits grew by 23.3% year-on-year to ₹1.38 trillion, indicating strong customer confidence and an expanding franchise. The Current Account Savings Account (CASA) ratio remained stable at around 29%, providing a sustained source of low-cost funding.

Resilient Asset Quality

The bank demonstrated disciplined credit risk management, resulting in stable and improving asset quality. The Gross Non-Performing Assets (GNPA) ratio stood at 2.3%, showing a marginal improvement both year-on-year and sequentially. The Net NPA ratio improved to 0.88%. Furthermore, slippages declined by 13% from the previous quarter, reflecting better performance in secured assets and normalization in unsecured portfolios. This prudent management of credit risk led to a moderation in credit costs, which in turn supported the overall profitability.

Strategic Initiatives and Expansion

During the quarter, AU Small Finance Bank continued its strategic expansion by adding 100 new touchpoints, including 27 new branches, primarily in urban markets. The bank also strengthened its brand presence by onboarding actors Ranbir Kapoor and Rashmika Mandanna as brand ambassadors for its new campaign, “Soch Badlo aur Bank Bhi”. In a significant regulatory development, the bank received approval from the Government of India to increase the foreign investment limit in its paid-up capital from 49% to the maximum permissible limit of 74%, opening up new avenues for capital infusion.

The Path to a Universal Bank

A pivotal development for the bank's future is the in-principle approval received from the Reserve Bank of India (RBI) in late 2025 to transition into a Universal Bank. This transition, a first for any small finance bank, is expected to lower its cost of funds significantly and enable it to compete more directly with larger private sector banks. The management is focused on making the necessary operational and technological investments to facilitate this evolution.

Market Sentiment and Analyst Perspectives

The market responded positively to the strong quarterly performance, with the bank's shares advancing post-results. However, brokerage views remain mixed, reflecting a debate on the stock's valuation. Firms like Motilal Oswal and Axis Securities maintained 'Buy' ratings, citing disciplined credit costs and margin expansion. In contrast, others like Nomura and Emkay Global held 'Neutral' or 'Reduce' stances, pointing to elevated operating expenses and a cost-to-income ratio that needs monitoring, especially during the transition to a universal bank.

Management Outlook

Commenting on the performance, MD & CEO Sanjay Agarwal noted that the banking sector remained resilient, supported by festive demand. He stated, "Against this backdrop, we delivered a strong and well-rounded performance in Q3 across growth, margins, asset quality and profitability. With our core growth engines firmly in place, and a once-in-a-generation opportunity to evolve into a universal banking platform, we are well positioned to scale with purpose, responsibility and long-term sustainability."

Conclusion

AU Small Finance Bank's third-quarter results for FY26 highlight its ability to deliver strong, profitable growth while maintaining prudent risk management. The double-digit profit growth, expanding balance sheet, and stable asset quality underscore its operational efficiency. As the bank moves forward with its strategic expansion and the transition to a universal banking platform, its ability to manage operating costs and navigate the competitive landscape will be crucial for sustaining its growth momentum.