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Asset quality deteriorates; CE remains key monitorable

SMA overdue/restructured book increases to ~21%/6.6%

* Bandhan Bank (BANDHAN) reported 1QFY22 PAT of INR3.7b, above our estimate – supported by margin improvement (170bp QoQ) and lower provisions v/s MOFSLe– even as MFI loans / total AUM declined 9%/~8% QoQ. On the liability front, the CASA ratio came in stable at ~43%, while the proportion of retail deposits improved to ~83% (v/s 79% in FY21).

* Slippage was elevated at INR16.8b (annualized slippage ratio of ~9%), with MFI slippage at ~INR10.4b. Therefore, the GNPA ratio increased 137bp QoQ to ~8.2%. Provisions were elevated, with annualized credit cost at 7.2% of loans. Thus, the provision coverage ratio (PCR) improved to ~62% of loans (v/s 50% in FY21). The restructured book increased sharply to ~INR53b (6.6% of total AUM). SMA loans surged to 21%, while a large portion of the SMA overdue in Assam was eligible for a relief package. As a result, LGDs would remain controlled.

* Collection efficiency (excluding NPAs) in the MFI portfolio stood at 86% (~85% for West Bengal) and remains a key monitorable in the near term. Overall, asset quality remains uncertain, and we estimate credit costs to remain elevated at 5.5% of loans for FY22 (similar to FY21 levels). Maintain Neutral.

Restructured portfolio grows to 6.6% of AUM; PCR improves to ~62%

* Bandhan reported PAT of INR3.7b (v/s estimate of INR1.8b) despite elevated provisions of INR13.7b (annualized credit cost at 7.2% of loans). NII growth came in at 17% YoY (4% above estimate) despite sequential decline in AUM growth (~8% QoQ), supported by 170bp QoQ expansion in margins to 8.5%. Other income grew 38% YoY, supported by a benign base. PPOP, thus, grew ~18% YoY to INR18.7b (5% beat).

* AUM declined ~8% QoQ (up 8% YoY) on ~9% QoQ decline in the MFI portfolio and 4% QoQ decline in the housing portfolio. The share of the MFI portfolio stood at ~66% of total AUM (v/s ~67% in FY21). Total disbursements in the MFI portfolio during the quarter stood at INR60b, while collections came in at INR135b, resulting in sequential AUM decline.

* Deposits grew ~28% YoY to INR773b, led by ~48% YoY growth in CASA deposits to ~INR332b. As a result, the CASA ratio stood at 42.9% (v/s 43.4% in FY21). The proportion of retail deposits improved to ~83% (v/s 79% in FY21).

* On the asset quality front, slippage stood elevated at INR16.8b (annualized slippage ratio of ~9%). Therefore, the GNPA ratio increased 137bp QoQ to ~8.2%, while the NNPA ratio declined 22bp QoQ to 3.29%. Provision coverage improved to 61.8% (v/s 50.3% in FY21). Furthermore, the total restructured book stands at INR40.6b (7.6% of AUM) in the MFI portfolio and ~INR12b in the housing portfolio. Thus, the total restructured book stood at ~INR53b (6.6% of AUM). Total SMA overdue increased sharply to ~21% (v/s 8.6% in FY21 and 16.6% in 3QFY21). Collection efficiency (excluding NPAs) in the MFI portfolio stood at 86%, with 85% for West Bengal, while it dropped to 67% for Assam. This was largely due to strict lockdowns and political interference through the announcement of waivers / relief packages.

* In Assam, the majority of the SMA overdue was eligible for a relief package. The total Assam portfolio stood at INR63.5b (12% of MFI loans), of which INR35.8b was eligible for the Assam relief package. Furthermore, in the noneligible portfolio of INR27.7b, nearly 76% of the portfolio is making part/full payments. Thus, INR6.6b of the portfolio is stressed, of which INR4.8b is already recognized as NPA, resulting in incremental stress of INR1.8b. The total SMA 1/2 overdue in Assam stood at ~INR16b (24.6% of loans). This suggests the majority of the SMA overdue is eligible for a relief package. The bank is also carrying provisions of INR8b on this portfolio, which leaves room for the possibility of a write-back in the Assam portfolio as the relief package is implemented.

Highlights from management commentary

* Slippage from the MFI portfolio was ~INR10.4b, with recoveries and upgrades of INR5.1b. At the portfolio level, total slippage stood at INR16.8b, while recoveries and upgrades at ~INR10b.

* The bank has availed CGFMU (a guarantee from the central govt) on the total portfolio of INR143b.

* Nil disbursements were made in Assam during the quarter. Also, there were nil disbursements under the credit guarantee scheme.

Valuation and view

BANDHAN reported higher-than-estimated PAT, supported by margin expansion. This was despite elevated slippages/provisions due to (a) the second COVID wave (which severely impacted the MFI sector) and (b) the disturbance in credit culture due to loan waivers. Restructuring/SMA overdue in the MFI book increased sharply. Provision coverage increased to ~62%, which gives us some comfort. Collection efficiency in the MFI portfolio stood at 86%, with 85% for West Bengal – closer to the rest of India. Overall, asset quality remains uncertain as the pool of restructured/SMA overdue remains high. Thus, we estimate credit cost to remain elevated at 5.5% of loans for FY22 (similar to FY21 levels). Maintain Neutral, with revised TP of INR330 (2.4x FY23 ABV).

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