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Accelerated provision surprise; uncertainty lingering

About the stock: Bandhan Bank was incorporated in 2015 as RBI granted a universal banking license. The bank has a strong presence in eastern and northeastern India with MFI loans being its forte.

* Total 66% of loans are from emerging enterprise business (EEB)

* It has 1168 branches in 34 states, UTs and total customer base of 2.4 crore

Q2FY22 Results: Huge accelerated provisioning marred bottomline

* GNPA up 264 bps QoQ to 10.8%; restructuring at | 8326 crore (10.2% of book)

* Accelerated provision of | 4600 crore led to unexpected loss of | 3009 crore

* NII down 8.5% QoQ, NIMs contract 90 bps QoQ to 7.6%

* Loan growth at 6.6% YoY while deposits up 23.8% YoY

What should investors do?

Bandhan Bank has underperformed in the past year as challenges pertaining to asset quality have emerged with the micro loan segment being impacted the most.

* We retain our HOLD rating on the stock

* Target Price and Valuation: We value Bandhan Bank at ~2.5x FY23E ABV and revise down our target price to | 270 from | 310 earlier

Key triggers for future price performance:

* GNPA & restructured spiked; accelerated provision timing unclear

* Knocking off ~7% of advances in Q2 & improvement in collection to bring down credit cost in H2FY22E

* Management guides substantial recovery in H2; delivery key for re-rating

* Improvement in disbursement to support business off-take ahead

Alternate Stock Idea: Besides Bandhan, in our coverage we also like CSB Bank.

* CSB Bank has shown meaningful transformation in its overall performance in the past few years and currently has focus on gold and SME loans

* BUY with a target price of | 380

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