Maintain ADD on Bandhan Bank - Hard pivot ahead to offset volatile core franchise - HDFC Securities

Mr Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities.

Bandhan Bank (BANDHAN) hosted an Analyst Day to articulate its medium[1]term strategic priorities around portfolio diversification and strengthening of its customer franchise. While the bank's focus on building borrower discipline in its flagship business and accelerated investments in portfolio diversification and distribution could gradually yield constructive outcomes, near-term return ratios are likely to remain soft from continued provisions and elevated opex. The management guided for major stress flowing into the 90dpd bucket, resulting in sustained one-off provisioning requirement during H2FY23. While we factor in elevated credit costs, we remain conservative on the underlying customer franchise, arguing for a lower multiple as BANDHAN pivots towards relatively low-risk businesses, with implications for potential franchise RoEs. Maintain ADD with a TP of INR273 (standalone bank at 1.9x Sep-24 ABVPS).

Flow-through to NPA calls for elevated provisioning: As of Sep-22, the stress portfolio (SMA + restructured + NPA) stood at INR95bn (10.5% of loans). The management expects flow-through from early buckets and slippages from the identified pool of delinquent customers to result in the stress portfolio further ballooning. BANDHAN guided for elevated credit costs (2.5% - 3%) in H2FY23, subject to collection efficiencies sustaining at current levels (~95- 96%). Additionally, CGFMU recoveries are expected to the tune of ~INR9.5bn, which when accounted for, will likely result in lower provisioning requirements.

Portfolio diversification remains a strategic priority: Bandhan Bank's foray into secured retail and commercial banking businesses is on track (Q2FY23: 40% of the mix) in an effort to drive greater franchise stability. Further, BANDHAN is also striving to reduce the concentration risk on its MFI book by migrating group loan customers towards lower-risk individual loans (16% of the mix). Affordable housing has emerged as a key growth driver with housing disbursements up 90% YoY in Q2FY23. We believe these efforts are necessary to reduce volatility in its flagship customer franchise over the medium term.

Tighter underwriting standards likely to test core portfolio: While the move to cut credit lines to customers with suspect "intent to repay" is a long-term positive for borrower behaviour, this raises structural questions on the bank's conventional moat in its flagship micro-credit business.

Mean reversion gets further delayed: Elevated stress recognition with limited sight on recoveries/potential write-offs in the core EEB portfolio raise concerns on BANDHAN's ability to quickly revert to normalised asset quality outcomes. This is likely to drive steady-state profitability lower concomitant with a rising mix of secured retail/commercial portfolio, with implications for potential franchise RoEs and hence, the implied valuation multiples.

Shares of Bandhan Bank Limited was last trading in BSE at Rs. 240.10 as compared to the previous close of Rs. 235.60. The total number of shares traded during the day was 1242365 in over 14621 trades.

The stock hit an intraday high of Rs. 243.00 and intraday low of 236.00. The net turnover during the day was Rs. 298401177.00.

Source : Equity Bulls

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