Bandhan Bank Rating: Buy | Short-term pressures are manageable

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We hosted the CEO of Bandhan Bank for a roadshow in the United States. He pointed out that after the Covid pain, business has normalized on disbursements and collections. Diversifying loan mix and geography are key objectives. In the short term, while the first quarter tends to be seasonally weak, flooding in Assam may impact business for 3-4 weeks and some restructured loans may slip but are well provisioned. Maintain Buy.

Target diversification across products and geography: Management emphasized that diversification in loan mix should lead to geographic diversification and that the bank is expanding into segments such as two-wheeler lending, lending on the road. gold and personal loans; The share of housing loans may increase slightly from the current 24%.

Floods in Assam may impact business for 3-4 weeks: Floods in Assam (about 9% of MFI loans and about 6% of total loans) were worse than past trends and business may take 3 to 4 weeks to normalize. For comparison, Cyclone Amphan in West Bengal (in 2020) was much worse and caused a credit cost of around 3% on the state book. Therefore, management believes that the impact can be absorbed within the indicative cost of credit range of 2-2.5%. Our sensitivity analysis on Assam suggests that a 5ppt. higher cost of credit in Assam may lower FY23 earnings by around 5%.

Seasonal trends and slippages in restructured loans: Q1 tends to be a weaker seasonal quarter with lower disbursements and collection efficiency (200-300 bps below Q4). However, steady rainfall is expected to help normalize post-harvest activity and into the festive season. Restructured loan recoveries are around 60%, which is a little lower than our expectations. This can lead to larger slippages in Q1/Q2 and reversal of interest income. However, the impact on the cost of credit should be manageable as the bank has sufficient reserves for this and is also seeing recoveries from the CGFMU and the Government of Assam. waivers. As a result, management reiterated its cost of credit forecast of 2-2.5% and aims to achieve an ROE of 25% in the coming years.

Hold Buy: We believe that while seasonal and Assam-related issues will have an impact in the short term, these can be absorbed into existing provision reserves/manageable cost of credit levels. Thus, the bank should benefit from a rebound in earnings/improvement in credit dynamics. After the recent correction, valuations are attractive at 2.1x one-year forward adjustment. PB and we keep our buy call with a target price of Rs 430.

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