Bandhan Bank's deviation from its track record (of resilience better than peers) due to state-specific events in its dominating geographies of Assam and West Bengal, has led to disappointment in collection efficiency (sub-90% in Jan), credit cost (>5.5% annualised) and pro forma GNPLs (at 7.12%). Key question, at this juncture, is to what extent near term state-specific disruption/uncertainty can challenge the longevity of superior growth/return business model. Unique, socially responsible, market-leading franchise housed under robust liability franchise with adequate capitalisation will aid in sufficient operating profit/assets at >6%, enough to absorb such interim shocks. Revising credit cost estimate factoring interim risks, we tweak earnings by 15%/12% for FY21/FY22E and BV by 5%. However, it can still churn 3.5%/20% RoA/RoE and 20% growth for FY22E that can sustain 3.7x PB multiple. Maintain 'BUY' with a revised TP of Rs505 (earlier Rs537). Key risks: Uncertainty on events unfolding up to elections in West Bengal and implementation of Assam State Bill can weigh on interim valuations.
- Operations in Assam - what will be the game plan: Bandhan has been treading cautiously in Assam - share is down to 14% in MFI portfolio (from 17%). Uncertainty around state government bill for MFI-lending has created moral hazards, impacting borrowers' repayment behaviour. Consequently, collection efficiency in Assam has plunged from 88% in Dec'20 to 78% Jan'21 (MTD). Till the time stability returns, incremental disbursements will be limited in the state. Also, alluding to such behaviour, 15-20% drop in collection efficiency can translate to 1.2-1.5% additional credit cost.
- West Bengal - elections around the corner but should that be a cause of concern: Bandhan has the highest EEB portfolio in West Bengal - collection efficiency there is holding up at 89% for January MTD (albeit a drop from 90% in Dec'20). There were expectations of a pick-up, which has been derailed due to the anticipated loan waiver announcements during elections. However, it is unlikely to disappoint the way political risks in Assam unfolded and given the vintage and collection efforts, collection efficiency should stabilise soon.
- Metrics to gauge customer behaviour: Bank has reported pro-forma GNPLs on the overall book of 7.12% and 95% flowing from MFI pool suggests 10% pro-forma GNPL for MFI business. Excluding the partial installment paid by the customers, this would be half of the reported number. Currently, 0-dpd is 76.5%, 31-60dpd is 9-10% and 61-90bps at 4-5%. In terms of customers, 80% are paying on time and regular and 13% are making part payment. Towards this, with Rs10bn provisioning in Q3FY21, it carries cumulative provisioning of Rs31.2bn (4.1% of overall AUM and 5.9% of MFI AUM). Also to note, there has been no restructuring or write-offs during the quarter. We believe further 1.0-1.5% credit cost (of overall AUM) in Q4FY21 and another 1-8-2.0% in FY22E can adequately cover up this unanticipated risk of unfavourable developments.
- Superior operating profit metrics are enough to absorb these shocks: Bank reported 23% YoY/5% QoQ growth in advances, 8.3% NIMs and >50% operating profit growth. Adjusting interest reversals on pro-forma GNPLs (though not warranted for customers making partial payment as interest is recovered first), NIMs would have been lower by 1.4%. Nonetheless, with support from PSLC, distribution income and contained opex, operating profit will have still sustained 20% plus growth.
- Top-up not material enough; growing proportion of EEB individual loans: EEB individual growth proportion has now risen to 10% and overall EEB grew 6% QoQ/30% YoY to Rs530bn. Mortgages and commercial banking were flat QoQ with mere 1-2% growth. Disbursements in EEB group was flat YoY (up 50% QoQ) and EEB individual loans doubled QoQ thereby, leading to overall disbursement growth of 14% YoY/60% QoQ. Top-up disbursements were <6% of overall disbursements compared to 15% earlier. Building in >20% growth, >7.5% NIMs and operating expense growth of >20%, we expect operating profit to grow at 20% over FY20-23E and settle at >6% of assets in FY22/FY23. This should manage the upcoming credit cost and still deliver RoAs of 2.6% in FY21, 3.7% in FY22 and 4% in FY23.
- Liability muscle strengthening: Deposit gained further traction - up 8% QoQ thereby, reporting 30% YoY growth to Rs712bn. Retail proportion has inched up 400bps to 81% and CASA spiked to 43% (from 38.2%) - 66% YoY growth in CASA. It has sourced 245k new CASA accounts and mobilised incremental CASA of Rs52.2bn. Average SA balance has risen 50% YoY to 59k and 67-68% of customers are with SA balance of less than Rs0.1mn.
- Long-term growth diversification will assuage MFI's near-term concerns: The bank has unveiled Vision 2025, where it aims for rapid diversification in non-EEB segments and reduce the proportion of EEB segment to 30% (from >60% currently). The objective would be to convert vintage EEB customers to individual loan and then help them transform to MSME customer. This will take commercial banking book to 30% (from 9%). In housing, besides affordable home loans, will focus on micro and prime housing that will boost mortgage proportion to 30% (from 25%). It will also build new retail business verticals namely personal loans, 2-wheeler, gold loans and vehicle loans wherein it will leverage technology in sourcing and assessing the customers. This new retail vertical is likely to constitute 10% of AUM.
Shares of Bandhan Bank Ltd was last trading in BSE at Rs.341.05 as compared to the previous close of Rs. 359.85. The total number of shares traded during the day was 2451549 in over 58221 trades.
The stock hit an intraday high of Rs. 372.4 and intraday low of 335. The net turnover during the day was Rs. 871615514.