Bandhan Bank - Transformation towards a more predictable mode : Buy - Anand Rathi

Diversification across products and regions are strategic priorities of Bandhan Bank. This would transform its business model to be more scalable and sustainable. For this, the bank reinforced its top management, hiring professionals from various private banks. A combination of deepening product penetration and branch penetration across states would drive a 21% loan CAGR over FY23-25. With asset quality issues likely to be peaked out in H2FY23 earnings are expected to normalize thereafter. We believe, on a sustainable basis, Bandhan would deliver 2.5%+ RoA and 25% RoE. We initiate coverage on Bandhan Bank with a BUY rating and a target of Rs 327, valuing the bank at 1.9x FY25e ABV.

Transformation to a diversified asset base: Diversification across consumer finance products and regions (beyond West Bengal and the North-east) are strategic priorities of Bandhan Bank. This would transform its business model to be more scalable and sustainable. (Its group loans business would drop to 28%, from 40% now.) For this, the bank reinforced its top management, hiring professionals from various private banks (slides 10 & 11). A combination of widening product penetration and branch penetration across states such as UP, Gujarat, AP, Telangana and Bihar would drive a 21% loan CAGR over FY23-25

Rural tailwinds, strong brand recall: With rural tailwinds in the offing, we build in high-teen growth for the MFI sector over the next couple of years. Despite little product differentiation and stiff competition among nearly 200 MFI lenders (incl. NBFCs-MFIs, banks and SFBs), our channel checks suggest that Bandhan Bank commands a very strong and recognizable brand name across wide regions. Non-Bandhan customers recognise the brand name and aspire for a loan from it on account of better service, greater ticket sizes and lower cost of interest

Asset quality issues to peak in H2 FY23: The highest Covid-related stress was seen in the contact-intense micro-finance segment, leading to elevated stress among MFIs. Bandhan was severely hit since its core MFI book (60%+ of overall loans) was concentrated in the East and North-East (65%+ of its MFI book). In Q2 FY23, it had ~8% of its EEB book in the SMA 30+ category, amounting to ~Rs45bn. We believe most of this stress from the EEB book would flow through in Q3 FY23 and slippages should start easing from Q4 FY23

Asset quality issues to peak in H2 FY23: The highest Covid-related stress was seen in the contact-intense micro-finance segment, leading to elevated stress among MFIs. Bandhan was severely hit since its core MFI book (60%+ of overall loans) was concentrated in the East and North-East (65%+ of its MFI book). In Q2 FY23, it had ~8% of its EEB book in the SMA 30+ category, amounting to ~Rs45bn. We believe most of this stress from the EEB book would flow through in Q3 FY23 and slippages should start easing from Q4 FY23

On the path toward RoA normalization: The MFI segment overall, incl. Bandhan, is experiencing a strong turnaround with disbursement/collections normalising. With stress related to its EEB likely to be absorbed in the near term, its credit cost is expected to soften from FY24. Stable NIM (7%+), greater efficiencies and credit cost would translate to a 2.8% RoA by FY25, in the top quadrant of returns in the banking sector

Valuation: We pencil in a healthy ~21% loan CAGR over FY22-25 and expect profitability to normalise with the RoA at 2.5%+ and the RoE at 20%+. We initiate coverage on the stock with a Buy rating at a target price of Rs327. This implies a ~1.9x P/ABV multiple on its FY25e book, which has been arrived at using the two-stage Gordon Growth model. Key risks: 1) More-than-expected stress arising from the EEB book, 2) Less-than-expected loan growth, 3) External shocks; further Covid waves could markedly hurt the bank's financials

Shares of Bandhan Bank Limited was last trading in BSE at Rs. 237.05 as compared to the previous close of Rs. 236.20. The total number of shares traded during the day was 289520 in over 4394 trades.

The stock hit an intraday high of Rs. 241.55 and intraday low of 232.65. The net turnover during the day was Rs. 68275261.00.

Source : Equity Bulls

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BandhanBank INE545U01014 AnandRathi Q3FY23 ResultUpdate