Bandhan Bank - Visibility improving towards normalcy - ICICI Securities

Bandhan Bank (Bandhan) has reported better-than-expected PAT of Rs9.2bn in Q2FY21 (down 5% YoY, up >65%), buoyed by 25% YoY growth in operating profit and lower credit cost. Contingency buffer build up continued (another Rs3bn, taking cumulative buffer to 2.8% of AUM) - a move towards guided credit cost range of 3.5% over the next few quarters. Collection efficiency trends improved MoM (91% in MFI, 98% in mortgage and commercial banking). In fact, 95% MFI customers are making payments (dragged by few states) and top-up loans are being offered to 12.3% customers. Disbursement growth in MFI was back to 75% in Q2FY21 (of last year) and 95% post moratorium. Investment in franchise, roadmap to diversify rapidly beyond EEB segment improves visibility on medium-term growth. We adore Bandhan's long-term franchise of MFI, affordable (unique, socially responsible and market leader with >20 years track record) housed under a solid banking franchise with adequate capitalisation and strengthening liabilities. Maintain BUY with target price of Rs455.

- Collection efficiency crosses 90% in MFI, 100% in NBFC-MFI and 98% in SME segments: Collection efficiency in MFI business mirroring the trend in MFI industry has witnessed improvement - in terms of value 68%/89%/91% over Jun/Sep/Oct and in terms of customers at 67%/94%/95%, respectively. Though relatively lower compared to peers, it doesn't include arrears and 76% customers have paid their full EMIs. Statewise, collection efficiency in West Bengal was 90% by value (96% by customers), Bihar 97% (99%), while Assam though improving MoM is still lagging at 87% (88%). In other product verticals, housing finance and SME at 98% and 100% in NBFC lending is encouraging. Top-up loans constitute 7.6% of EEB and are extended to 12.3% of customers. One key trigger to boost collection efficiency (by another 5% point) would be regularisation of train services in all locations.

- Holds on to its guidance of 3.5% of credit cost: Credit cost settled at lower-than-expected level (at 2% run-rate compared to 4.9% in Q1FY21) as it made further buffer of Rs3bn towards Covid-19, taking the aggregate additional provision to Rs21bn (2.8% of advances and 4% of MFI book). Despite collection trends being better than expected, it continues to hold on to its guidance of 3.5% overall credit cost due to the ongoing pandemic. We are conservatively building in 3.4%/1.9% credit cost for FY21E/FY22E.

- AUM grows 19% YoY / 3% QoQ: In EEB, Q2FY21 disbursements being back to 75% of pre-Covid level supported 5% QoQ growth in AUM. The book was flat for mortgage and commercial banking business. Seeing the opportunity to consolidate debt amongst vintage customers, Bandhan is looking to gain their wallet share and has disbursed top-up loans of Rs35k average to 12.3% of its customers. With RBI restrictions being lifted on branch addition, the bank is now expanding network and building human capital base. It plans to add 574 branches in FY21E, which coupled with seasonally strong H2, can support 22% of AUM growth for FY21E.

- Liability muscle strengthening: Overall deposits grew >34% YoY with CASA improving further to 38.2% and >78% retail deposits. The bank has revised SA rates to 3% in September and TD rates by 150bps over the past 18 months - repricing benefit should help further pull down deposit cost.

- Unveiled 2025 roadmap - 5-year vision: The bank has unveiled vision 2025 where it aims for rapid diversification in non-EEB segments and cut 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 graduate to MSME being a sole lender to those customer base - 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 PL, 2-wheeler, gold loans and vehicle loans - leveraging technology in sourcing and assessing the customers. This new retail vertical is anticipated to constitute 10% of AUM.

Shares of Bandhan Bank Ltd was last trading in BSE at Rs.300.85 as compared to the previous close of Rs. 289.25. The total number of shares traded during the day was 689024 in over 10951 trades.

The stock hit an intraday high of Rs. 307.9 and intraday low of 292.85. The net turnover during the day was Rs. 207923133.

Source : Equity Bulls

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