Investors who picked up AU Small Finance Bank Ltd shares at its qualified institutional placement (QIP) last month have got a sour deal. Shares of the small finance bank have dropped roughly 15 per cent since then. What could be painful is that the turnaround looks long drawn now.

AU Small Finance Bank’s March quarter performance has offered little to assure investors. Sequentially, operating profit plummeted 57 per cent because core interest income didn’t grow much. What’s more, is that operating profit was propped up by a jump in other income. On a year-on-year basis, the metrics were decent but far from the historic trend by the lender.

The only upside was the 21 per cent sequential jump in disbursements. This is unlikely to sustain for the bank. AU Small Finance Bank’s operations are concentrated in states hit hard by the second wave of the pandemic. Among small finance banks, the lender may witness a disproportionate hit on its balance sheet because of this exposure. Ergo, analysts are wary that the lender’s trajectory in FY22 may not meet earlier expectations.

There is more pain when it comes to asset quality, too. Gross bad loans formed 4.3 per cent of the book for the March quarter and restructured loans stood at 1.8 per cent of total advances. The most restructured book was made of small business and vehicle loans, the bank said. More than half the bank’s loan book is towards these two segments. The outlook on the loan segments is not sanguine.

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True, the lender reported an impressive improvement in collection efficiencies. In the March quarter, it was able to collect repayments from all its borrowers and even made recoveries from past bad loans. Again, sustainability of these metrics is debatable in the wake of the second wave. Perhaps these factors have been already worrying investors, reflected in the 8 per cent drop in the share price on F. The lender’s stock has underperformed most of its peers and the QIP valuation now appears lofty.