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Despite slower growth and surge in NPAs due to recognition of stress from the ECLGS pool, as guided by the RBI, Bandhan Bank reported a strong beat on our PAT estimates, coming in at Rs7.2bn (Emkay: Rs4.5bn), due to steady margins and lower provisions (as the bank need not make provisions on the ECLGS guaranteed stress pool). Bank expects the recovery to improve, led by ARC sale and CGFMU recovery, while it sees credit cost at ~2% for FY24. We cut our FY24-26E earnings by 4%-9%, factoring-in the slower growth and higher opex. However, we expect improvement in RoA to 2.2-2.5% and in RoE to 17-21% over FY24-26E, from the low of 1.5/12% in FY23, as the stress pool moderates from its Covid peak. We retain our BUY rating, with revised TP of Rs285/share, based on 1.7x Jun-25E ABV (vs Rs300/share earlier, based on 1.8x Mar-25E ABV/share).

Growth remains sub-par in 1Q, but Management guides for acceleration in 2H

Bandhan Bank posted AUM growth of 7% YoY/was down 5% QoQ in a seasonally weak 1Q, as the MFI book declined 12% YoY/10% QoQ as well as due to repayment of loan (of Rs22bn) from one large account. Retail Housing growth, too, came in lower at 10% YoY/1.4% QoQ. However, Bank guides for healthy credit growth at 20% YoY, driven by the secured retail portfolio. Despite the CASA ratio decline of 3% QoQ to 36% leading to higher CoF, NIM remained stable at 7.3%, supported by healthy improvement in yields. Bank expects maintaining NIM at ~ 7%, owing to healthy yields and contained CoF.

Recognition of ECLGS NPA leads to spike in GNPA ratio

GNPA ratio witnessed a spike (190bps) QoQ to 6.8% due to recognition of the ECLGS stress pool of up to Rs5.8bn, as mandated by the recent RBI circular. Excluding ECLGS too, slippages stood higher, at Rs13bn/6% of loans, due to continued elevated stress flow from the MFI book (Rs9.2bn) and the Housing book (Rs2.2bn), on the back of system upgrade. The overall stress pool continues to be higher at Rs62bn, against which the bank has coverage of 69% (103%, including guarantees). Bank expects healthy recovery from the sale to ARC in Q2, as also in 2H, while CGFMU recovery should also lead to higher ‘other income’. Bank expects credit cost to clock at ~2% in FY24.

Outlook and Valuations

We cut our FY24-26E earnings by 4%-9%, factoring-in the slower growth and higher opex. However, we expect improvement in RoA to 2.2-2.5% and in RoE to 17-21% over FY24-26E, from a low of 1.5% and 12%, respectively, in FY23. We retain BUY, with revised TP of Rs285/sh, based on 1.7x Jun-25E ABV (vs Rs300/sh, based on 1.8x Mar25E ABV), as the stress pool moderates from its Covid peak. Key risks: Micro-economic risk leading to recovery in growth/asset-quality and Senior Management attrition.

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