Assam waiver not factored into estimates; growth has improved; RoEs expected to move towards 20%; Buy retained with TP of Rs 380
Our interactions with the CEO & CFO of Bandhan Bank encouraged us on asset quality as recoveries from stressed loans can bring down NPLs over the next few quarters; also Assam waiver isn’t factored in estimates. Growth is improving across MFI & housing loans; they see limited impact of inflation as borrowers are in livelihood businesses. Bank will build buffer-provisions and still improve ROE above 20%. Valuations are attractive & we rate as Buy.
Negative net slippages ahead; Assam waiver not part of provisioning: Management highlighted that collections continue to hold-up, even from NPLs and overdue borrowers. With a large part of stressed loans already recognised as NPL and over 60% of such borrowers repaying dues, bank can see negative net slippages (i.e. recoveries & upgrades > slippages). Moreover, bank’s provisioning buffers have been built without factoring in recoveries from Assam Govt waiver; hence any reduction in expected payout should not impact credit costs. The state govt has paid dues to current borrowers in FY22 & factored in about Rs 25 bn as relief to overdue borrowers with scope for review.
Growth picking up; nature of lending could keep demand resilient: Demand for loans is picking up as business is normalising and even disbursements on housing loans have improved. The recent hike in interest rates on MFI loans should help margins even as share of low-yielding housing loans rises. The impact of inflation on target segment should be manageable as they are mostly engaged in livelihood businesses. A sensitivity analysis shows that a 5% change in topline for FY23 impacts earnings by 10%, and a 50bps change in credit cost also impacts earnings by 10%.
Expect ROEs to move towards 20% even as reserves are built: Over the next 4-5 years, bank plans to increase the share of housing loans to 30% (from ~24% now). While this will bring down margins/ROA, it can allow better leveraging. In the backdrop of surge in credit costs seen in past 2-3 years, bank will build reserves/buffers that can insulate earnings from volatility in credit costs. Still, ROEs should move towards 20% mark from FY23 onwards.
Maintain Buy: We highlighted that Bandhan is a good turnaround bank in India given the reversal to normalised trends on growth and profitability combined with reasonable valuations (2.7x FY23 adjusted PB). We rate the stock as Buy with PT of Rs 380 based on 2.8x Dec-23 adjusted PB.