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Weak performance; still time to recover…

About the stock: Bandhan Bank was incorporated in 2015 as RBI granted a universal banking license. The bank has a strong presence in eastern and northeastern India with MFI loans being its forte.

* Total 66% of loans are from emerging enterprise business (EEB)

* Also, 1152 branches in 34 states, UTs and total customer base of 2.3 crore.

Q1FY22 Results: Bandhan Bank reported a deterioration in asset quality.

* GNPA up 137 bps QoQ to 8.18%; restructuring at | 4661 crore (5.8% of book)

* Accelerated provisions of | 751 crore, PCR up from 50% to 62% QoQ

* NII up 20% QoQ, NIMs improve 170 bps QoQ to 8.5%

* Loan growth flat YoY while deposits up 27.6% YoY, down 0.8% QoQ.

What should investors do?

Bandhan Bank has underperformed in the past year as challenges pertaining to asset quality have emerged with the micro loan segment being impacted the most.

* We retain our HOLD rating on the stock

* Target Price and Valuation: We value Bandhan Bank at ~2.3x FY23E ABV and maintain target price for the stock at | 310 per share.

Key triggers for future price performance:

* Balance sheet strengthening could keep near term credit cost high

* Sharp recovery in collections post unlocking could boost performance

* Assam government’s scheme and credit guarantee fund acts as safety net

Alternate Stock Idea: Besides Bandhan, in our coverage we also like CSB Bank.

* CSB Bank has shown meaningful transformation in its overall performance in the past few years and currently has focus on gold and SME loans

* BUY with a target price of | 380.

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