Bandhan Bank - Portfolio vulnerability comes to fore; limited buffer will keep credit cost elevated - ICICI Securities

Asset quality toll in Assam (25% of state exposure written-off or recognised as NPAs) and West Bengal (15%) marred Bandhan Bank's Q4FY21 earnings. Post aggressive write-offs of 3.5% of EEB (micro credit) AUM, FY21 credit cost of 5% on overall AUM, it exited FY21 with 3.5% net NPA. Besides this, it carries vulnerable EEB SMA-1/2 pool of 2.5%/2.8% (including 11% of Assam exposure and 6% of West Bengal's portfolio). Despite a challenging year, the bank didn't pull back on growth - in fact disbursed Rs568bn in EEB growing the book by >25%. The comfort flows from collection efficiency of 99.6% for FY21 new borrowers and 13% of NPA customer honouring full EMI and 20% more than 50% EMI; however, that can be subjected to incremental risk due to the second covid wave disruption. To factor in risks, we revise credit cost estimate to 3.4%/2.0% thereby, cutting earnings by 23%/6% for FY22/23E. Robust liability franchise and superior operating profit to assets at 6.5% aided in absorbing portfolio hiccups and it still churned RoA/RoE of 2%/13% plus in FY21. Higher growth than our liking posing incremental risks can weigh in FY22 as well before earnings and RoE normalises in FY23E. With cut in book value (by 7%), we revise our target price to Rs465 (earlier Rs501) and maintain BUY. Key risks: Stress elevated even beyond our expectations and derailment of asset/liability franchise amidst challenges.

- Collection efficiency of 99.6% on new borrowers to be an incremental risk hereon: The bank has reported a sequential uptick in collection efficiency (CE) for Mar'21 to 95% (excluding arrears, including NPA and write-offs) and adjusting for stress pool it was 98%. West Bengal CE during election period was managed at 95% (compared to 90% in Dec, 89% in January), Assam at 83% (compared 88% in Dec'20, 78% in Jan'21) and other states at 97%. Currently, new borrowers added in FY21 are holding on to collection efficiency of 99.6% (including 99.6% CE in West Bengal and 98.5% in Assam). With economic activity disruption due to the second wave, there can be CE risk to these new borrowers. Management highlighted that due to the second wave, collection efficiency in April was down 3-4% points.

- Customer profile vulnerability comes to the fore; asset quality haunts: State-specific outcomes in its dominating states of West Bengal and Assam have taken a toll on its asset quality towards the end of this fiscal. It has to aggressively write-off Rs19.3bn - equivalent to 3.5 of MFI AUM and 2.5% of overall AUM. Elevated slippages of Rs22bn (10% run-rate on overall book) were offset by write-offs and GNPA came in at 6.8% against 7.1% pro-forma GNPA in Q3FY21. Not only EEB (micro banking), GNPAs were elevated at 7.6% (WB at 10.2%, Assam at 14.2%, other states 3%) but mortgages too had GNPA of 3.1% and commercial banking at 9.1% (including one legacy account).

Besides this, it has SMA-2 pool of 2.5% (3.2% WB, 5% Assam, 1% other states) and SMA-2 pool of 2.8% (3% WB, 6% Assam, 2.8% other states). It has also disbursed Rs18.3bn to 1.72mn customers in FY21 (equivalent to 3% of EEB AUM and 2.2% of overall AUM), of which, Rs3.3bn is towards customers tagged as NPA for other facilities. The bank has restructured mortgage loans worth Rs6.2bn - 0.7% of the overall AUM and 3% of mortgage book. The stress pool bought to fore customer profile vulnerability.

- EEB risk analysis suggests bank has provided only for non-paying and up to 50% EMI paying customers: Of the EEB NPA of Rs44.5bn in EEB (micro credit book), Rs3.3bn is under ECLGS. Of the balance, 14% are full paying customers (Rs5.9bn), 64% are part-paying customers at Rs26.3bn and balance 22% at Rs9bn are non-paying. In the part-paying borrowing profile, Rs9.3bn have paid up to 25%, Rs7.7bn from 25-50% and Rs9.3bn have paid more than 50%. Vulnerable pool, thereby, would tend to be non-paying and up to 50% paying customers - equivalent to Rs26bn and that is exactly the provisioning it is currently carrying. For fully paying and customers paying more than 50% - equivalent to Rs15.2bn, there will be a possibility of flow-back or an upgrade into previous buckets. Larger part of this is sitting in net NPAs.

- Contingency buffer utilised in Q4FY21; not enough cushion left: The bank made incremental provisioning of Rs15.9bn in Q4FY21 (>8% annualised run-rate) towards slippages this quarter and thereby, ended FY21 with overall credit cost of 5%. Besides this, there was utilisation as well of accelerated provisions and buffer came down from Rs31.2bn to mere Rs3.88bn. We remain skeptical of net NPA of 3.5%, SMA-1/2 pool of 2.8%/2.5% and collection efficiency of 99.6% for new borrowers that might become vulnerable in disruption due to the second wave. We are, therefore, building in higher credit cost of 3.4%/2.0 for FY22E/23E (against our earlier estimate of 1.9%/1.4%) thereby, leading earnings downgrade of 23%/6% for FY22/FY23E, respectively.

- Interest reversals on stress weigh down NIMs: Q4FY21 was marred by higher slippages of Rs22bn, which coupled with pro-forma slippages of ~Rs40bn in Q3FY21, led to interest reversals of Rs5.34bn in Q3FY21. The bank had indicated marginal impact of 140bps due to pro-forma slippages. NIMs due to interest recognition came down to 6.8% against its run-rate of upwards of 7.5% and NII was down 15% QoQ (up 6% YoY). With some further stress in FY22, there will be some pressure on NIMs and benefit of deposit cost also seems to have been appropriately reflected. We are building in margin (calculated) of 7.2%/7.5% for FY22E/FY23E as against 7.4% in FY21.

- With rising stress, now getting conservative on top-up loans: The bank after having entertained top-up loans to a large extent in Q2FY21 (top-up disbursements of Rs23.7bn) has been conservative. It disbursed merely Rs9.2bn in Q3FY21 and seeing incremental stress in dominating states, top-up loans were negligible at Rs2.6bn in Q4FY21. No top-up loans were disbursed in Assam at all, only 0.3% in West Bengal and 0.7% in other states. The run-rate was otherwise 5-6%.

- Steep growth curve could pose risks in the future: The bank is trying to diversify outside its dominant states - the proportion of AUM ex-West Bengal/Assam is up from 39% to 43% registering a growth of ~40%. Within West Bengal and Assam, the focus is to upsell with higher vintage and proper repayment track record to individual lending (from group lending) - proportion up in West Bengal from 8% to 15% and in Assam from 1% to 12%. Bank has transformed ~11% of its group loans to individual lending. With disbursements of Rs568bn in FY21 (Rs268bn in Q4FY21), despite challenging environment, EEB portfolio was up 10% QoQ and 26% YoY and overall advance growth at 6% QoQ and 22% YoY. Mortgages after consolidating for a while post the merger, reported ~10% growth in FY21 (up 2.5% QoQ). We remain wary of robust growth in FY21 and given the on-going second wave of covid, we expect some moderation in growth. Overall, we are building in credit growth of 16%/22% for FY22E/FY23E, respectively.

- Robust liability franchise supports NIMs and growth: Deposit gained further traction - up 10% QoQ thereby, reporting a hefty 37% YoY growth in FY21. Of this, CASA deposits surging >60% YoY led to improvement in CASA ratio to 43.4% from 36.8% in FY20. Average SA balance for non-EEB customers has risen 41% YoY to 59k from 41k. Though bank is mobilising higher SA deposits, which are up 65% YoY, it is coming at a higher SA cost. Bank would gradually look to revise its SA rates and has already lowered SA rate for minimum balance to 3% from 4%. Currently, overall SA cost for the bank stands at 5.15%.

Shares of Bandhan Bank Ltd was last trading in BSE at Rs.297 as compared to the previous close of Rs. 294.65. The total number of shares traded during the day was 932019 in over 13096 trades.

The stock hit an intraday high of Rs. 302.45 and intraday low of 291.3. The net turnover during the day was Rs. 276423787.

Source : Equity Bulls

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