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Near-term asset quality risk persists

* Despite healthy business growth, Bandhan reported lower PAT at Rs1bn (est: Rs4.1bn) in Q4FY21 mainly due to lower NIM (6.8% vs. 8.1% yoy). NIM was affected by higher interest reversals and higher loan loss provisions due to higher NPAs in Assam – MFI portfolio post announcement of waiver.

* Overall GNPA stood high at 6.9% mainly due to stress in EEB/MFI (7.6%), while SMA pool (8- 90DPD) remained elevated at 8.6%. Collection efficiency in the EEB portfolio (ex-arrears) was moderate at 95% in Q4 and slipped 3-4% in Apr’21 due to Covid-19-induced lockdowns, thereby posing a near-term asset quality risk.

* The impact of elections on Assam/WB portfolios should wean off gradually, but the second wave of Covid-19 may delay recovery and may elevate fresh delinquencies. This coupled with low specific PCR (50%) and low contingent provision buffer (0.5% of AUM) would call for higher LLP. Thus, we reduce our earnings estimates for FY22/FY23 by 21%/13%.

* We cut our TP by 22% to Rs390 from Rs500 to factor 10% lower ABV of FY23E (driven by lower earnings) and TP multiple (2.7x vs. 3.1x FY23E ABV). However, we retain long-term Buy rating on the stock, given strong liability build-up, asset diversification strategy away from MFI, superior return profile (RoA/RoE of 2.5-3.4%/17-25% over FY22-24E) and reasonable valuations.

Strong business momentum, but higher NPAs weigh on margins:

Bandhan Bank has reported healthy AUM growth of 21% yoy/8% qoq to Rs802bn, primarily driven by better disbursement trends in MFI loans (27% yoy). Share of MFI portfolio is now low at 59% with the rising share of non-East portfolio as a part of the bank’s long-term strategy to diversify product-wise and geographically. Share of Assam/WB stands at 45%/12% vs. 47%/15% a year ago. Deposit growth remained strong at 37% yoy/10% qoq to Rs780bn, while CASA ratio improved by 50bps qoq/660bps yoy to 43.4%, depicting the bank’s strong liability profile. However, NIM was lower at 6.8% (8.3% in Q3) due to interest reversal of Rs5.4bn on NPAs. It has guided for NIM to remain in the range of 7.8%-8%.

Second Covid-19 wave could delay recovery from election impact in Assam/WB:

Bandhan reported higher gross slippages of Rs22bn in Q4 and Rs69bn in FY21 (6.5% of loans) due to the twin effect of elections in Assam/WB and the first Covid-19 wave. However, similar to other banks, Bandhan too took a massive write-off of Rs19bn (2.2% of AUM), leading to some moderation in NPA to 6.8% (7.1% pro forma GNPA in Q3). Of the NPA accounts, 64% are partly paying and 14% are fully paying, indicating that these customers intend to pay and thus improve recovery. However, we believe that the second Covid wave induced lockdowns could not only delay recovery in NPAs (6.9%), but also in EEB - SMA pool which is now 8.6% of loans and potentially lead to fresh delinquencies. Thus, we build in higher NPAs/LLP in FY22/FY23, leading to 22%/13% cut in earnings estimates.

Outlook and valuations:

We believe that the MFI business is inherently prone to disruptions, be it political or natural adverse events. Thus, the bank needs to accelerate its asset diversification strategy. We cut our TP to Rs390 from Rs500 to factor in lower earnings/TP multiple (2.7x vs. 3.1x FY23E ABV), but retain Buy. Key risks to our estimates/call: Higher-than-expected NPA formation and derailment of growth momentum due to the raging second Covid-19 wave.

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