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Transitory pressures – Story remains intact
With three one-offs impacting profits, Bandhan Bank’s Q3 PAT came in 15% below our estimates, but is set to reverse in the current quarter as the one-offs appear to be transitory. These included: i) Slowdown in micro lending growth momentum to 30% (is that a slowdown?) due to some caution exercised in the N-E given the political situation, ii) opex increases due to the Gruh merger (an accounting change in fees payable to lenders) and iii) one-time Rs2bn provisioning on standard assets pertaining to its exposure in one N-E state (where on-time repayments are normalising; past disruptions have seen similar return to normalcy). On the back of trimming our loan growth estimates, we fine-tune our target price downwards by 7% to Rs814 representing a yet robust 56% upside meriting a BUY rating on the stock.
The analyst call was a positive event (similar to Q2) yielding several new disclosures as well as the conservative provisioning policy of the management.
* Q3 performance (like-to-like merged basis): Merged loan book grew an estimated 19% on a comparable basis YoY, which we expect will bounce back in coming quarters as disruptions in the N-E subside. A technical increase in NPLs due to accounting standards applicable to Gruh’s book under Indian GAAP (vs IndAS earlier) saw margins dip 20bps QoQ to 7.9% as also due to excess liquidity maintained to repay Gruh’s borrowings – both factors unlikely to recur. Accountingrelated changes in the opex line (mentioned above) saw operating profits grow 22% YoY. After taking an additional Rs2bn provisioning on standard loans in the Assam book, credit costs were at ~190bps (60bps excluding this extra provisioning) with gross NPAs increasing to 1.9% and coverage ratio dipping to 58% vs 68%, sequentially. Given the large provisioning taken last year on account of IL&FS as well as the lower tax rate, reported PAT growth remained robust at 71% YoY.
* Earnings outlook: We cut our earnings estimates by 3% in FY21E and 13% in FY22E mainly on the back of lower loan growth as we remain conservative vs our earlier stance and yet expect the bank to report RoAs of 3.8-4% on merged basis over FY20-22E.
* Valuation and target price: The stock trades at a P/E of 18x and P/BV of 3.6x on FY21E basis vs its historical average of 5.2x. We trim our target price to Rs814 representing an upside of 56%. We reiterate our BUY rating on the stock.
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