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Buy Bandhan Bank Ltd For Target Rs. 501

West Bengal election outcome uncertainty addressed; overhang subsides

Bandhan Bank has underperformed Bank Nifty by 20-25% over past 3M/6M/12M. State-specific events in its dominating geographies of West Bengal and Assam led to deviation from its track record of better resilience than peers. There was disappointment in collection efficiency (sub-90% in Jan’21), credit cost (>5.5% annualised run-rate in Q3FY21) and proforma GNPAs (spiked to 7.12%). Besides Q3FY21 performance, uncertainty around election outcome in its dominating state has also weighed on stock performance.

However, All-India Trinamool Congress (AITC or TMC) has won the West Bengal state election, thereby suggesting status quo in state administration. This will subside the major overhang of election outcome on stock performance. Bank has potential to generate more than 3.5%/20% RoA/RoE and is currently trading at sub-2x FY23E book. Maintain BUY with an unchanged target price of Rs501.

Q4FY21 business update indicated bounce in collection efficiency and 8% QoQ growth

* Bandhan Bank’s financial results will be announced on 8th May’21 and it will throw more light on fundamental performance and asset quality behaviour.

* In its business update, the bank has reported retracement in collection efficiency in EEB (micro) to 95% in Mar’21 (from 92% in Dec’20 and 90% in Jan ’21).

* We will need to see flow into stage-3 from 1-90 dpd pool of 14-15% and also how much proforma GNPAs get upgraded.

* Bank carries cumulative provisioning of Rs31.2bn (4.1% of overall AUM and 5.9% of MFI AUM). We are building-in further credit cost of 130bps for Q4FY21 to cover unanticipated risk in specific dominating states.

* Interest reversals on proforma GNPLs (though not warranted for customers making partial payment as interest is recovered first), will weigh on NIMs to the extent of 1.3- 1.4%.

* Growth too settled at better than expected levels in Q4FY21: 8% QoQ and 21% YoY as against our expectations of 6% QoQ.

* Deposits were up 10% QoQ and 37% YoY for Q4FY21 amounting to Rs780bn. Of this, CASA share inched up to 43.4% from 42.9% QoQ and 36.8% YoY.

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