Published on 12/10/2020 1:50:14 PM | Source: HDFC Securities Ltd

Buy Bandhan Bank Ltd Ltd For Target Rs.389 - HDFC Securities

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Buy Bandhan Bank Ltd Ltd For Target Rs.389 - HDFC Securities

Our Take:

Bandhan Bank (BBL) has consistently demonstrated a strong track record in growing its balance sheet/earnings (AUM grew by CAGR 44% FY10-20) and maintained a robust market share/cost leadership with superior return ratios, pristine asset quality and low-cost DSC (door step service centers) network. The bank continues to envision being a pan-India player and intends to leverage distribution network of both entities (erstwhile Bandhan Bank and Gruh Finance that merged into it) for cross selling. Due to the nature of short duration loan, stress is identified early and remedial measures can be taken. As the lockdown is gradually lifted incidence of moratorium is falling and collection trends have been improving. Although delinquencies might increase in the short term, the bank has taken additional provisioning. With the synergies of the merger kicking in, we expect the growth momentum to resume in H2FY21.


Valuations and Recommendations:

Despite the slowdown we expect the bank to deliver RoA in the range of 3.3-3.5% and RoE of ~19-20%. BBL’s is a unique franchise with ample growth visibility, stellar efficiency metrics and best-in-class return profile. We believe the premium valuations are justified given the huge opportunity in MFI business. BBL’s profitability trends are superior to industry leaders given its strong margin profile, efficient cost structure and low credit costs. We have valued the bank at 2.75x FY22E ABV for a base case target of Rs 356 and 3.0x FY22E ABV for a bull case target of Rs 389 over 2 quarters. Investors can buy the stock at LTP and add on dips in the price band of Rs 289-293 (2.25xFY22E ABV).


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