Bandhan Bank’s earnings should, in our view, double over FY21-23 to Rs 53bn with a pick-up in lending & halving of credit costs. Diversification of loans & deposits with parent’s foray into NLFs would strengthen franchise & meet regulations. We expect ROEs to rise by 700bps to c.22% even as the bank builds buffers to keep credit costs at c.2% of avg. loans. These should drive rerating. We initiate coverage with Buy and price target of Rs 470 on 3x Mar23 adj. PB.
Clouds of uncertainty to clear; growth to pick up. We believe that overhang on Bandhan Bank’s growth and asset quality would be addressed by 1QFY22 as clarity on waivers & impact of new norms in Assam emerge, RBI issues harmonized norms and collection efficiencies in microloans improve.
We think that the tightening of rules/ impact of waivers in Assam will not be disruptive, post elections in Assam and West Bengal, the overhang on two key states (c.40% of loans) will be set for 5 years, Bandhan Bank should be able to manage transition to RBI’s new norms, and residual credit costs on microloans are likely to be manageable in the range of Rs 11bn-31bn (5-13% of net worth), accommodated by Tier I CAR of 21% and PPOP/ avg assets of +6%.
Hence, we see the halving of credit costs improve disbursements from FY22. Diversification should strengthen franchise. The bank is diversifying its presence across segments. On the lending side, it could leverage opportunities in affordable housing (25% of loans now), with competitive funding costs & wider network.
In microfinance, its expansion in new states and individual-lending segment could help growth and tide-over caps on individual borrowing limits. Its deposit franchise has scaled-up well (CASA ratio at 36%) and we see headroom for it to lower costs and gain share in current deposits (especially as the Govt. has opened agency business to new banks). The group’s planned foray into the insurance/ mutual fund business (non-lending financials) can strengthen the brand and add fee sources for the bank. Earnings to rebound.
We expect earnings to rebound post 1HFY22 as credit costs fall from 5% of average loans in FY21 to c.2% over FY23-24 and uptick in disbursements supports loan growth of 25%. Hence, we see improvement in earnings from Rs 24bn in FY21 to Rs 53bn in FY23 and estimate ROEs to rise to c.23% in FY23 even as the bank builds buffers that keep credit costs at c.2% of avg. loans vs. FY15-20 average of 1.2%. Our interactions with mgt. as well as channel checks indicate that the business should see normalcy set in soon.
Valuations attractive; initiate with Buy. Bandhan Bank has underperformed lenders and trades at a 35% discount to its historical 3-year average (since IPO). The key risks to earnings & valuations are worse-than-expected losses and tighter norms in Assam or imposed by RBI. Upside could arise from stronger disbursements/top line & better asset quality. Also, the rebound in earnings and diversification of businesses could support valuations rising beyond historical average. We initiate coverage with a Buy rating and a price target of Rs 470 based on 3x Mar-23 adjusted PB.
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