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Lower other income leads to earnings miss

Bandhan reported profits of INR 8.9bn, +138% YOY (vs JMFe of INR 12.8bn) due to lower other income which was an outcome of lower PSLC income and MTM impact during the quarter. GNPLs inched up by 79bps QoQ to 7.25% driven by lower collections in a seasonally weak quarter which was also impacted by RBI’s new microloan norms and Assam floods (in Jun’22). Despite this, overall stress formation –SMA2+fresh slippages was restricted to ~2.4% of EEB loans. Overall stress pool in EEB segment (>30 days overdue + restructured + NPLs) stands at INR 121bn (21% of EEB loans, +170bps QoQ) against which Bandhan holds provisions of 63%. We conservatively build credit costs of 330bps for FY23 (vs management guidance of 2.5%) to factor delayed recoveries in restructured pool (esp. WB) and impact of Assam floods. Also, we have reduced our fee income estimates given impact of RBI’s review of Bandhan’s PSL eligible assets (PSL assets declined 24% YoY in FY22) and thus leading to Bandhan investing ~INR 33bn in RIDF bonds in FY22 (INR 56.3bn as of Jun22). However, while currently the NIM impact is ~20-25bps, we believe Bandhan has multiple levers to absorb this drag (differential pricing allowed as per RBI’s new microloan norms). We are building 24% CAGR in loans over FY22-24E while have lowered growth in core other income to 17%; thus implying a 3-4% cut in our EPS estimates for FY23/FY24E and we now forecast avg. ROEs of 23.5% over FY23-24E. Our TP for Bandhan is INR 440. Maintain BUY.

* Multiple issues mar collections in a seasonally weak quarter: Slippages were elevated at INR 11.25bn (6.2% annualised of loans) with INR 9bn from EEB segment of which INR 3.15bn slippages were from restructured pool. Collections were impacted primarily in the restructured pool and also due to Assam floods (in Jun’22). Collection efficiency (ex restructured ex NPL) declined to 97% in Jun’22 vs 99% in Mar’22. Management indicated that CE in Assam should be back to normalised levels by Sep’22. Overall stress pool in EEB segment (>30 days overdue + restructured + NPLs) stands at INR 121bn (21% of EEB loans, +170bps QoQ) against which Bandhan holds provisions of 63%. We conservatively build credit costs of 330bps for FY23 (vs management guidance of 2.5%) to factor delayed recoveries in restructured pool (esp. WB) and impact of Assam floods. Repayments from stress pool and payouts from Govt. schemes will further reduce eventual losses.

* Growth recovery to accelerate in 2HFY23: Bandhan’s AUM degrew by 2.7% QoQ on account of -6.8% QoQ growth in MFI book, though non-MFI growth was healthy at +4.3% QoQ. MFI book degrew on account of a) seasonality, b) new MFI regulations leading to lower disbursements and c) Assam floods. However, management expects growth to pick-up from 2HFY23 onwards and expects FY23E loan growth at +20% YoY. Bank’s deposit franchise remains robust with growth of +20% YoY. CASA stood at 43.2% (+160bps QoQ) while retail deposits stood at 78%. PPOP degrew by 7% YoY on account of a) 70bps QoQ decline in NIMs to 8.0%, b) lower non-interest income due to lower PSLC income and MTM losses on invt. book and c) elevated opex (+32% YoY).

* Valuation and view: While Bandhan’s current stress levels are high, adequate cushions exist (provision cover and high PPOP levels) to absorb the eventual losses and thus we forecast avg ROE of 23.5% over FY23-24E. Maintain BUY with a TP of INR 440 valuing it at 2.6x FY24E BVPS.

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