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Business growth modest; restructuring book witnesses a decline

* BANDHAN reported a PAT of INR8.9b in 1QFY23 (7% beat), led by lower provisions, while operating performance stood weak. Business growth was modest, while margin declined by 70bp QoQ to 8%. CE (including NPA and restructuring) moderated to 91% in Jun’22 from 95% in Mar’22. Excluding NPA, CE moderated to 94% v/s 99% in Mar’22.

* Asset quality witnessed a deterioration, with GNPA/NNPA ratio rising 79bp/26bp QoQ to 7.3%/1.9%, while PCR stood stable ~75%. SMA overdue in the MFI book grew to 12.7% v/s 6.5% in 4QFY22, led by a sharp increase in the Assam portfolio.

* We remain watchful of asset quality and the high SMA book, particularly the Assam portfolio, which can keep credit cost elevated. We raise our FY23 earnings estimate by 5%, while the revision in our FY24 earnings estimate is a mere 1%, factoring in lower credit cost and a recovery in growth. We maintain our Neutral rating.

Margin declines by 70bp QoQ to 8%; PCR healthy ~75%

* BANDHAN reported a PAT of INR8.9b in 1QFY23 (7% beat) on lower provisions, which fell 56% YoY to INR6.4b. NII grew 19% YoY (in line). However, the same fell 1% QoQ due to modest loan growth and a 70bp QoQ decline in margin to 8%.

* Other income declined by 47% YoY. Total income grew a modest 4% YoY. PPOP declined by 28% QoQ and 7% YoY to INR18.2b (significant miss), while C/I ratio grew to 36% (v/s 28% in 4QFY22).

* AUM grew 20.3% YoY (-3% QoQ), with MFI loans/Housing portfolio rising 9%/27% YoY. The share of the MFI portfolio moderated QoQ to ~60% of total AUM. MFI disbursements declined by 64% QoQ to ~INR82.2b.

* Deposits grew 20% YoY to INR931b, though CASA ratio grew to 43.2% from 41.6% in 4QFY22. Retail deposits mix increased to 78%.

* On the asset quality front, slippages stood at INR11.2b v/s INR13.7b in 4QFY22, due to higher dissolution of restructured assets. As a result, the GNPA/NNPA ratio increased by 79bp/26bp QoQ to 7.3%/1.9%, with PCR healthy ~75%. Collection efficiency (excluding NPAs and including restructuring) in the MFI portfolio moderated to 94% in 1QFY23, with 94%/78% efficiency for West Bengal/Assam. Outstanding restructured in EEB book declined to ~INR21.4b (vs INR48.9b in Mar’22), while SMA overdue grew to 12.7% from 6.5% in 4QFY22.

Key takeaways from the management commentary

* The decline in the micro credit book is due to seasonality, floods in Assam, and new RBI regulations for MFIs.

* Other income was lesser due to a weak treasury performance and the lower fees were on account of smaller disbursements and sale of PSLC.

* Around 57% of customers from the restructured portfolio paid some installment, while 73% customers from its NPA pool made some payments.

Valuation and view

BANDHAN has reported a mixed 1QFY23, with a sequential drop in collection efficiency, resulting in deterioration in asset quality. Earnings beat our estimates, supported by lower provisions. Business growth was modest. However, the management has guided at a continued improvement in asset quality and steady trend in loan growth. Collection efficiency has moderated to 94% (in Jun’22), while SMA overdue grew to 12.7% from 6.5% in 4QFY22. We remain watchful of asset quality, mainly the high SMA book, particularly in the Assam portfolio, which can keep credit cost elevated. We raise our FY23 earnings estimate by 5%, while the revision in our FY24 earnings estimate is a mere 1%, factoring in lower credit cost and a recovery in growth. We maintain our Neutral rating, with a TP of INR320 per share (based on 2x FY24E BV).

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