AU Small Finance Bank falls 10% despite 53% profit jump

all Finance Bank Limited (AUBANK) fell as much as 10.35% to an intraday low of ₹845.40 on the NSE on October 26, despite reporting a 53% year-on-year jump in Q2 FY27 net profit to ₹858 crore. The stock had closed at ₹932.90 on Friday, and the results came out over the weekend. Net interest income grew 31.5% to ₹2,820 crore. Deposits rose 29% and loans 25% year-on-year. Gross NPA improved to 1.99%. Return on assets rose to 1.7% from 1.4%, and return on equity to 16.1% from 12.4%. The capital adequacy ratio stood at 18.54%. The headline profit is strong, and brokerages remain split rather than negative. Jefferies kept its Buy rating with a ₹1,250 target, and JPMorgan stayed Overweight with a ₹1,165 target, though both trimmed their targets. JPMorgan noted the bank is on track to beat its credit cost guidance this year. The market is focused on three concerns. First, net interest margin slipped about 10 basis points sequentially to 5.8%. Second, profit was helped by a 25% fall in provisions to ₹359.4 crore, while operating expenses rose 26% to ₹2,077 crore. Third, management guided for FY27 credit costs of about 0.9%, against roughly 0.73% in the first half, and flagged rural stress. To meet that full-year number, second-half credit costs would need to rise to about 1.07%. Nuvama cut its target to ₹925 with a Reduce rating, citing an expensive valuation of 2.5 times adjusted book value. Investors should watch credit costs and rural asset quality in H2, net interest margin trends, operating expense growth, and progress on the universal bank transition. The key question is whether AU can protect profit growth once provisions start rising again. Disclosure: I do not hold any position in AU Small Finance Bank Limited. This post is for informational purposes only and is not investment advice.