Bandhan Bank rating: Buy | Near-term pressures are manageable
We hosted the CEO of Bandhan Bank for a roadshow in the US. He highlighted that after the Covid pain, business has normalised on disbursements & collections. Diversification of loan mix & geography are key targets. In the near-term, while Q1 tends to be seasonally weak, floods in Assam can impact business for 3-4 weeks and some restructured loans can slip but are well provisioned for. Maintain Buy.
Targeting diversification across products and geography: Management highlighted that loan-mix diversification should lead to geographic diversification and the bank is expanding in segments like 2-wheeler loans, gold loans and personal loans; share of housing loans can rise marginally from 24% now.
Assam floods can impact business for 3-4 weeks: The floods in Assam (c.9% of MFI loans and c.6% of total loans) have been worse than past trends and business there can take 3-4 weeks to normalise. For comparison, the Amphan Cyclone in West Bengal (in 2020) was much worse and caused about a 3% credit cost on the state book. Hence, management feels that the impact can be absorbed in the guided range for credit cost of 2-2.5%. Our sensitivity analysis on Assam suggests that a 5ppt. higher credit cost in Assam can drag FY23 earnings down by c.5%.
Seasonal trends and slippages from restructured loans: Q1 tends to be a seasonally weaker quarter with lower disbursements and collection efficiency (200-300bps below Q4). However, stable rainfall should support normalisation of activity post harvest & during the festive season. The recoveries from restructured loans are around 60%, which is a tad weaker than our expectations. This can lead to higher slippages in Q1/Q2 and interest income reversal. However, the credit cost impact should be manageable as the bank is carrying sufficient buffers for the same and is also seeing some recoveries from CGFMU and Assam Govt. waivers. Hence, mgmt reiterated their guidance of 2-2.5% credit costs and aims to achieve 25% ROE in the coming years.
Buy maintained: We believe that while seasonal and Assam related issues will have a near-term impact, these can be absorbed into existing provision reserves/manageable credit cost levels. Hence, the bank should benefit from a rebound in earnings/improvement in lending momentum. Post the recent correction, valuations are attractive at 2.1x one-yr forward adj. PB and we retain our Buy call with a target price of Rs 430.