IGI Logo

Healthy core profitability; stress formation set to moderate

* Despite elevated provisions, Bandhan reported a beat on PAT at Rs3.7bn (est.: Rs0.8bn), mainly driven by healthy PPoP growth (up 18% yoy)/core PPoP@9.3%. Cumulative disruption due to Assam-WB election/Covid 2.0 led to a 138bps qoq rise in GNPA to 8.2% and sharp jump in restructuring to 6% of loans. However, the bank did not resort to much ECGLS/top-up loans.

* Overall collection efficiency (CE) stood at 89% (86% in Q1FY21) and SMA pool (8-90DPD) at a high of 12.5% (8.6% in Q4). The bank expects CE to improve as Assam/WB opened up in mid-July, though late. Assam govt.’s loan relief scheme is a positive, under which nearly 56% (Rs36bn) of the bank’s standard portfolio (Rs64bn) will be eligible for compensation. This should slow down incremental stress formation. Assam contributes nearly 22% of overall MFI NPAs.

* Of the remaining 44%/Rs28bn of the ineligible Assam portfolio, the non-paying standard pool is Rs4.8bn. However, the bank carries Rs8bn provision against the Assam portfolio apart from woff portfolio of Rs8-9bn, which could partly be written back at a later stage. Factoring in lower growth/higher LLP due to the Covid-led disruption, we cut FY22-24E EPS by 12-5%.

* We retain our long-term Buy rating on the stock given its enviable liability profile, steady asset diversification strategy away from MFI and an ability to deliver superior returns (RoA/RoE of 2.3-3.6%/15-24% over FY22-24E). We roll forward to 2.5x Sep’23E ABV and raise our TP to Rs410 from Rs390.

Growth slips but margin remains stable on better CoF:

Bandhan reported subdued AUM growth of 8% yoy/-8% qoq as disbursements were lower across business segments and the bank did not resort to much disbursements in ECGLS/top-up loans, unlike last year. CASA remains high and healthy at 43%, which coupled with lower interest reversals as the bank did restructuring instead of NPA recognition, led to healthy margins of 8.5% vs. 6.8% in Q4. Factoring in the higher focus on collections and possible pull-out in Assam, we trim our loan growth estimate for FY22 to 14% from 22%.

Unlocking of Assam/WB and clarity on Assam relief scheme to moderate incremental stress formation:

Bandhan reported higher gross slippages of Rs16.2bn (9.6%) but higher recovery/upgrade at Rs9.9bn moderated GNPA increase to 138bps qoq to 8.2%. The bank did not undertake ECGLS/top-up loans, but has done heavy restructuring (6% of loans) with the cumulative pool now standing at 6.6%. As per the bank, nearly 84% of restructured customers are paying (partly though), and thus the relapse rate remains low- to moderate. Overall collection efficiency (CE) stood at 89% (86% in Q1FY21) and the SMA pool (8-90DPD) at a high of 12.5% (8.6% in Q4). The bank expects CE to improve as Assam/WB opened up in July. The Assam government’s loan relief scheme instead of a waiver, incentivizing payment discipline and discouraging defaulters, should be positive for Bandhan’s Assam portfolio, which accounts for 22% of MFI NPAs.

Outlook and valuations:

In our view, the MFI business is inherently prone to disruptions - be it political or natural. As a result, the bank needs to accelerate its asset-diversification strategy. Factoring in lower growth/higher LLP due to the Covid-led disruption, we cut FY22-24E EPS by 12-5%. However, we raise our TP to Rs410 from Rs390, rolling forward to 2.5x Sep’23E ABV. Key risks to our estimates/call: Higher-than-expected NPA formation, including lower recovery from the Assam portfolio, and unsettling of growth momentum due to a potential 3rd Covid wave.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer