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Asset quality to normalize from FY24; business diversification is key

Expects credit cost to moderate to ~1.8% in FY24 v/s an average of 5.8% over FY21-23E At BANDHAN’s analyst day, the management spelt out its plans to diversify in terms of product and geographical mix. Asset quality-related issues are likely to peak in 3Q, but should normalize from 4QFY23. Mix in the MFI business is likely to moderate gradually as other segments gain scale. Overall, it expects credit cost to normalize by ~1.8%, with steady state RoA of ~3% (+/-15bp), even as the cost-to-assets ratio remains slightly higher due to investment in new businesses and branch expansion. We expect a FY24E RoA/RoE of 2.5%/21.1% and maintain our Neutral rating with a TP of INR270 (1.9x FY24E BV).

Mix of non-EEB business to increase; geographical mix to also get better

The management’s focus remains on product diversification, with the MFI mix likely to moderate as other segments grow at a faster pace. Mix in the MFI space will thus moderate to 26% by FY25. Housing Finance/Commercial Banking/Retail assets will constitute 30%/38%/6% of the total mix by FY25. The mix of West Bengal and Assam in MFI and SBAL loans will moderate to 40% by FY25 from 52% at present (30% in MFI). Within MFI, the mix of West Bengal/Assam has fallen to 37%/8% from 46%/15% in FY20. The mix of the Group business will moderate to 62%/53% by FY23/FY25, while the mix of SBAL is likely to increase to 38%/47%. At present, 100% of SBAL loans are to its erstwhile Group MFI customers. The regulator defines MFI customers as those with a household income up to INR0.3m, and thus NTB customers, higher than this income limit, can be tapped under the SBAL segment, which will drive overall growth

Asset quality to trough in 3Q; NPA flows to normalize from 4QFY23

Collection efficiency, excluding NPA, in the MFI book has improved to 96% in Oct’22 from 95% in Sep’22, while 93% of receivables were received in full in Oct’22 v/s 92% in Sep’22. The management expects the total stress portfolio to peak at INR102b in 3Q and subsequently moderate to INR97b in 4QFY23. BANDHAN aims to maintain overall coverage ~80% in 3QFY23. The same is likely to improve to 82% by 4QFY23. Overall, it expects slippages to peak in 3QFY23 and normalize from 4Q. It expects a steady state credit cost to be ~1.8% from FY24. In addition to this, it expects CGFMU recoveries of INR20-25b, with INR9b in 3QFY23 and the balance in 1QFY24, which will aid credit cost.

Housing Finance to report steady growth; domination of Affordable Housing to continue

The Housing Finance book stands at INR240b, with an average ticket size of INR1.8m and a portfolio yield of 10.8%. Penetration was lower (~11%), with the same in rural and semi-urban areas dropping to 5%, thus providing a INR30t opportunity. Disbursements in FY22 grew 43% v/s 29% for the industry. The management expects Housing loans to grow over 25% in FY23. Around 98% of its book is floating in nature, of which 65% are linked to the repo rate, which has helped move portfolio yields higher than pre-COVID levels. Asset quality trends have been stable, and LGDs in the restructured book are likely to be sub-2%. The bank has a lower prepayment rate (~10%), with balance transfers of ~4.5%. Currently, the indirect channels contribute ~80% to total sourcing, but the same is likely to fall to 60% over the next two-to-three years.

Commercial Banking: Fast growing portfolio aided by robust trends across segments

The bank offers various products under Commercial Banking. These include: SEL (Small Enterprise Loan of up to INR2.5m), LAP (INR3-100m), BBG (INR2.5-50m), MMG (INR50m-INR1b), and Institutional lending (INR150m-INR5b). The overall book has grown by 96% YoY, with GNPA ratio moderating to 5.6% at present (or 2.9% excluding IL&FS) v/s 9.6% a year ago. The management’s focus within this business remains on providing supply chain and other cash flow based financing, with an exposure to well-rated corporates. Around 92% of loans under Institutional lending have been offered to corporates rated A and above, with ~46% being PSL compliant. It is looking to further expand its product proposition to include MFs, the capital market, co-lending, Transaction banking, Treasury, and debt market services. It aims to expand its presence to 150 branches in regions other than East India.

Retail Banking: Growth to accelerate aided by an expanded product offering

BANDHAN has a wide product suite, including Gold loans, Personal loans, TwoWheeler loans, new Car loans, CV/CE loans, and Used Car loans, with most of these products getting launched in the past one year. Its Retail loan portfolio currently stands at INR21.61b, or 2% of total loans. The management expects this mix to rise to 6% by FY25. It also plans to expand its oldest Retail product (Gold loans) to 576/ 1,550 branches by FY23/FY25 v/s 430 branches at present. It aims to expand its partnerships with OEMs and other channel partners to drive growth and deepen its penetration outside its core geographies. It has constituted a dedicated credit risk team and bolstered its internal control systems to constantly monitor and assess the risk to keep asset quality under control.

Retail deposit mix to inch up to 80% by FY25; robust network to aid growth

The management’s focus remains on building a granular franchise, with CASA/Retail deposit mix to increase to 44%/80% by FY25 from 41%/74% at present. Around 93% of current accounts are from Individuals/Proprietors, with a mere 6% having a balance of over INR0.1m, signifying granularity. ATS for savings accounts stands at INR15k, with 30% of emerging affluent and affluent customers. The same for term deposits stands at INR0.44m, with the share of Retail rising to 42%. Acquiring government business is another key focus area. It aims to enhance its wealth proposition to boost deposits further. It is looking to expand its geographies to garner incremental deposits, with the mix of branches in Eastern India likely to moderate to 47% by FY25 from 54% at present. Around 30% of the proposed new branches are to be in five large deposit states, with the key focus states being Delhi, NCR, and Uttar Pradesh.

Estimate earnings to recover from FY24; maintain our Neutral rating

We note that credit cost in the MFI business tends to demonstrate severe volatility during stressful periods, but cycles are generally shorter and earnings recovery fairly sharp. Over FY20-22, while RoE plummeted to 0.7% from 23%, we estimate an equally quick recovery with RoE trending to 21% over FY22-24 from ~1%. Near-term slippages are likely to remain high as BANDHAN looks to clean up the remaining stress, which will continue to exert pressure on loan growth and margin. We remain watchful of its asset quality, particularly in the Assam portfolio, which can keep credit cost elevated. Though the management expects healthy recoveries over 2HFY23/1QFY24, slippages are likely to be higher during 3Q/4QFY23, thus keeping its overall performance under pressure. We maintain our Neutral rating with a TP of INR270 (based on 1.9x FY24E BV).

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