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Lower LLP leads to earnings beat; stress pool swells due to Assam floods

* Bandhan reported a beat on PAT at Rs8.8bn (est.: Rs6.5bn), thanks to lower provisions, partly offset by lower treasury gains and PSLC fees due to the declassification of select agri loans as PSL. However, the overall GNPA ratio rose 79bps qoq to 7.3%, and SMA pool was up by 600bps to 12.7%, mainly due to moratorium exit in the RSA pool and Assam floods.

* Overall AUM was up 20% yoy/down 3% qoq, mainly dragged down by MFI. However, on the positive side, mortgage growth has seen an acceleration. As per management, MFI growth should re-accelerate as the impact of regulatory changes and the Assam floods recedes. Despite a rising CoF, the bank expects NIMs to be stable in FY23, but structurally they should trend down due to the rising share of secured loans (incl. mortgages).

* Overall EEB stress pool has inched slightly to Rs121bn (20% of MFI loans/12% of overall loans), but the bank expects a strong recovery in H2 (CGFMU recovery of Rs25bn and flow of funds from the government’s Assam loan relief scheme) and a gradual normalization of Assam SMA pool by Dec’22.

* We trim our FY23-25 earnings estimates by 2-4%, mainly factoring in lower PSLC fees and high opex as the bank accelerates its investments in franchisee/people & tech. Retain Hold with an unchanged TP of Rs325 (2.2x Jun’24E ABV), given the bank’s liability profile, capital buffers and expected improvement in RoEs, while remaining watchful of the stress movement in the Assam pool.

MFI portfolio decelerates, but mortgage growth accelerates:

Bandhan reported sub-par credit growth due to slower disbursements (Rs54bn vs. Rs134bn), mainly in the MFI business. This was largely due to compliance with regulatory requirements in an otherwise seasonally weak quarter and some impact from the Assam floods. The bank expects MFI growth to improve with the heavy-lifting to be done in H2, by when the impact of Assam floods should also be moderated. On the other hand, mortgage growth has picked-up from the erstwhile Gruh franchise, armed with better pricing on the back of the bank’s advantageous CoF. The bank remains determinant to grow the non-MFI book at a faster pace, while also growing the secured asset book. Although this could have some structural impact on margins in the long run, it could reduce asset-quality volatility in the MFI portfolio.

Asset quality takes a hit due to Assam floods and flow from restructured pool: 

Gross slippages remain elevated at Rs11bn/6% of loans, which were mainly from the MFI restructured pool. This, coupled with the seasonally slow recoveries/upgrades, led to a jump in the GNPA ratio by 79bps qoq to 7.2%. The MFI book’s collection efficiency slipped to 94% in Q1 from 97% in Q4, mainly due to the Assam floods. The restructured pool has moderated to Rs58bn/6% of loans from Rs62bn/6.2% of loans due to the end of the moratorium; 43% of the borrowers are non-paying, and hence the incremental focus will be on normalizing the recoveries as the book comes out of the moratorium. The MFI stress pool inched up marginally to Rs121bn (20% of MFI loans/12% of overall loans), but the bank expects a robust recovery in H2 (CGFMU recovery of Rs25bn and flow of funds from the government’s Assam loan relief scheme).

Outlook and valuations:

Factoring in lower PSLC fees and high opex due to the accelerating investments in its franchisee/people & tech, we trim our FY23-25 earnings estimates by 2- 4%. Retain Hold with an unchanged TP of Rs325, based on 2.2x Jun’24E ABV, given the bank’s liability profile, capital buffers and expected improvement in RoEs, while remaining watchful of the stress movement in the Assam pool. Key risks: Prolonged asset-quality impact of Assam floods & delay in recovery from the Assam loan relief scheme.

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