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Bandhan reported an operationally in-line quarter with PAT at INR 7.2bn (-4% JMFe;-19% YoY, -11% QoQ) on the back of muted NII growth -1% YoY, +1% QoQ, lower credit cost at 2.55% (vs 2.96% QoQ) and sticky operational costs INR 13bn (+28% YoY, +1% QoQ). However, GNPA/NNPA inched up to 6.76%/2.18% (vs 4.87%/1.17% QoQ) as there was a one-off in asset quality on account of change in classification of NPA for advances given under ECLGS amounting to INR 5.8bn in 1QFY24 – though no impact on overall stress pool as it was already part of SMA2. NIMs remained flat at 7.3% and mgmt expects NIMs to stay around 7.0% in FY24 on the back of yields repricing upwards (despite moderation with changing portfolio mix) in line with CoF. Bandhan’s AUM saw a seasonal decline to 1.03trn (+7% YoY, -6% QoQ) with moderation in MFI segment (-12% YoY, -10%QoQ), though management expects growth to pick up going ahead and guided for 20% YoY growth in FY24E. Bandhan’s secured book stands at 46% and is expected to grow to 50% by FY26. Deposit momentum remained healthy at +17% YoY, flat QoQ with growth driven by term deposits (+31% YoY, +6% QoQ) as against decline in CASA deposits (-3% YoY, -8% QoQ) with CASA ratio at 36% (-330bps QoQ). We build AUM CAGR growth of ~21% over FY24- 25E and deposits CAGR growth of 22% over FY24-25E. Bandhan’s recovery has lagged other microloan peers though we believe it is on the right track. Given the cyclically positive construct on microloans as an industry, Bandhan’s pan-India presence, focus on diversification of its book leads to expected RoA/RoEs of 2.8%/22.2% by FY25E, we believe risk-reward is favourable at current valuation of 1.3x FY25E P/BV and 6.2x FY25E P/E (stock has corrected by 18% from its recent peaks). We value the stock at 1.8x FY25e P/BV and maintain BUY with a TP of INR 320.

* Seasonally tepid loan growth, deposit momentum sustains: Bandhan reported an AUM at 1.03trn (+7% YoY, -6% QoQ) given 1Q is a seasonally weak quarter for MFI segment (- 12% YoY, -10%QoQ), though management expects growth to pick up going ahead and guided for 20% YoY growth in FY24E. However, other segments witnessed steady growth: commercial banking (+78%YoY) and housing (+9.5% YoY) whereas, retail saw moderation on QoQ basis (+86% YoY, -39% QoQ) driven by repayment in one large short term loan account (INR 21.5bn). Bandhan continues to take steps towards diversifying its AUM and steadily bringing the proportion of MFI segment lower (50% in Jun23). Deposit momentum remained healthy at +17% YoY, flat QoQ with growth driven by term deposits (+31% YoY, +6% QoQ) as against decline in CASA deposits (-3% YoY, -8% QoQ) with CASA ratio at 36% (-330bps QoQ). However, Bandhan exhibits granularity of deposits with retail deposit standing at 71% to total deposits and MFI customers contributing to only 4% of total deposits. We build AUM CAGR growth of ~21% over FY24-25E and deposits CAGR growth of 22% over FY24-25E.

* One-off in asset quality as per RBI guidelines: Bandhan witnessed an inch up in GNPA/NNPA to 6.76%/2.18% (vs 4.87%/1.17% QoQ) and decline in PCR at 69% (- 800bps QoQ) on account of change in classification for advance given under ECLGS amounting to INR 5.8bn to NPA in 1QFY24. However, this change in classification has not

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