Bandhan Bank’s (Bandhan’s) Q4FY21 PAT of Rs 1 bn disappointed due to asset high quality stress (GNPL 6.8%). High overdues (>5% in 30dpd+ of MFI loans) in spite of big create-offs (>2% of loans) and provision buffer getting virtually totally utilised, increases our caution additional from that espoused earlier. The red flags about MFI persist and get reinforced by second wave. Additionally: (i) regulatory overhang (ii) increasing restrictions in WB and (iii) pool overall performance increase employing leading-ups/ECLGS, stay issues. Given added uncertainty and close to complete depletion of provision buffer, we reduce target many to 2.2x (2.5x earlier), top to revised TP of Rs 280 (earlier Rs 310). Maintain Reduce.
Asset high quality stress begins to manifest: Given the warning indicators in MFI sector, we did anticipate higher strain. This has began to show in Bandhan’s earnings. High slippages (>10%), elevated headline GNPLs, almost complete provision buffer drawn down (of Rs 27 bn, >3% of AUM) and pretty big create-offs (of Rs 19 bn, >2% of AUM) reflect the underlying strain.
Franchise continues to strengthen: One aspect wherein Bandhan has been regularly impressive is in scripting a prosperous liability franchise story–trend continued in Q4FY21 as nicely. This, we think, will assistance Bandhan’s core profitability development momentum.
Outlook: Even although Bandhan’s extended-term evolution of organization model and potential to provide cross-cyclical superior returns enthuse us, close to-term red flags about sector (overleveraging, aggressive competitors) and uncertainty about asset high quality outcomes compel us to preserve ‘REDUCE/SU’.