IGI Logo

Transforming into a true universal bank, but asset quality remains a near-term irritant

* Focus on geographic as well as product diversification to de-risk the balance sheet: Bandhan Bank has embarked on the journey to transform itself into a true universal bank, led by geographic diversification (incrementally in Uttar Pradesh, Bihar, Gujarat, Karnataka, Andhra, and Telangana, among others) as well as asset portfolio (non-MFI portfolio). The bank remains determined to grow its non-MFI book (including affordable housing, prime housing, micro/larger LAP, gold, cards, VF, PL, and commercial banking loan pool) at a faster pace and, thus, reduce the share of the otherwise volatile group MFI portfolio to 28% by FY25E from 40% currently. However, we believe this structural portfolio shift towards secured and low-yielding assets should have a bearing on margins in the long run but, at the same time, reduce asset-quality volatility.

* Retail/commercial banking build-up would lead to an elevated cost structure in the medium term: The bank plans to invest heavily in people, technology, and infrastructure over the next 2-3 years to strengthen its retail liability franchise as well as asset portfolio. The bank has re-organised its business verticals and is now deepening management bandwidth, including hires from premier domestic/MNC banks, which would lead to higher staff costs. Retail, as well as commercial banking portfolio build-up, invariably would also come at a higher cost, including phygital footprint as well as sourcing payouts, including the new DSA channel for housing/business loans. Thus, the bank expects the cost-asset ratio to remain elevated at ~3% in the medium term.

* Stress recognition to continue in the near term leading to elevated LLP: The bank has indicated to accelerate stress recognition from the MFI SMA portfolio, leading to higher NPAs and, thus, provisions (Rs24bn in 2H without factoring CGFMU recovery of Rs9.5bn). Factoring higher provisions (to be front-loaded in 3Q) in 2H, we have built-in ~3.5% LLP for FY23E. The bank believes pre-Covid repayment discipline will take some more time to come back, while the bank would also prefer to build some contingent buffers and, thus, guides for medium-term LLP at 1.8% vs. normal period LLP <1%

* Retain Buy but cut earnings/TP, factoring accelerated stress flow: We believe a structural shift in portfolio towards non-MFI loans would have some bearing on margins, more so amid rising CoF, partly offset by lower interest reversals once asset quality normalizes. Operational cost is also expected to remain elevated in the medium term as the bank transforms itself into a pan-India universal bank offering enhanced retail + commercial banking products. Factoring the elevated credit cost, we have cut our earnings estimates by 19%/6%/5% for FY23E/24E/25E, but we expect RoAs to gradually recover at 1.6-2.6% over FY23-25E from the low of 0.1% in FY22 vs. yesteryear highs of >3%. We retain Buy with a cut in TP to Rs300 (from Rs330), based on 1.9x Dec-24E ABV vs. earlier 2x Sep-24E ABV. Key risks: Prolonged asset-quality stress, delay in recovery from the Assam loan relief scheme, and higher management churn

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