Well placed to manage disruptions; upgrade to Buy
* Improving collection trends; strong provision buffer: We believe that MFIs will be early beneficiaries of the unlocking of economy, which is reflecting in their improving collection trends (>70-80%). Bandhan too has indicated collection efficiency of over 80% and should rise up to 90% by Oct’20 with possibly business as usual by Dec’20. Based on past experience during the regime change in 2011, management expects the impact, if any, of WB state elections in early CY21 to be limited and manageable. The bank has built a strong Covid-19 provisioning buffer of ~190bps (ex-normal std provisions ~40bps) and plans to proactively build such contingency buffers to deal with future eventualities on the back of its strong PPoP, supported by healthy NIMs and subsiding operational cost.
* Strong liability profile and low CoF provide flexibility to diversify asset base without diluting NIMs/profitability: Since inception, Bandhan has built a strong and granular retail liability franchise, reflecting in its healthy CASA (37%) base/low CoF (6.6% down from >8%) and even withstanding the deposit scare, unlike small- and mid-size banks, after the Yes Bank saga. The bank has steadily gained deposit market share in its home state and is now making in-roads in South/West/Central India, too. On the back of the healthy deposit flow, it has recently cut savings rates in its low-end bucket (Rs0.1mn) to 3%, in line with large peers, which coupled with a hike in lending rates should help improve NIMs. The bank has also strategically diversified its asset portfolio away from MFIs (share now at 64% (61% ex-individual loans) from >90%) to mortgage loans (via Gruh acquisition) and has added products like high-margin gold and SME loans.
* Re-orienting business verticals, management structure to gear for next level of growth: The bank is gearing up for the next level of structural transformation toward a true universal bank like large private peers by re-organizing business verticals and leadership positions either by hiring laterally or up-skilling. It has created a new vertical, Emerging Entrepreneurs Business (EEB), to house its MFI and micro-home/enterprise business, headed by Kumar Ashish (ex-ICICI). The mortgage business remains under Mr Choksey with a succession plan in place. The bank plans to deepen the leadership pool in other asset/liability verticals.
* Risk-reward turning favourable; upgrade to Buy: Bandhan offers the best blend of both worlds − strong, stable funding profile like HDFCB, which we believe has its own premium and high sustainable return ratios (RoA>3%/RoE>20%) like an NBFC (i.e. BAF). The bank has a good track record of managing cyclical/external disruptions, which could hold in the current cycle as well. However, the long-term strategy to deal with regular eventualities is to diversify the asset base (product/geographically) and proactively create a provisioning buffer even if it means sacrificing near-term profitability, which the bank has adopted very well. Amid improving collection trends and recent stock correction post promoter OFS to meet regulatory requirement, the stock is reasonably valued at 1.8x Sep’22E ABV and provides a decent upside to our TP of Rs390, based on 2.7x Sep’22E ABV).
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