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Elevated provisions and reversals sharply dent earnings

CE recovers but not out of the woods yet; Maintain Neutral

* Bandhan Bank (BANDHAN) reported a weak quarter, with net earnings sharply trailing estimates, affected by higher interest reversals of ~INR5.4b. Thus, NIMs declined 150bp QoQ, while elevated provisions of INR15.9b further impacted earnings. Total COVID-led provisions for FY21 comprise INR19.3b toward write-offs and another ~INR29b toward loan loss provisions.

* On the business front, AUM grew 8% QoQ, led by strong disbursements in the MFI portfolio. Liability traction was robust at ~37% YoY, with the CASA ratio improving 50bp QoQ.

* The GNPA ratio improved despite elevated slippages, primarily on account of higher write-offs during the quarter. However, PCR fell sharply to ~50% (v/s 67% proforma in 3QFY21). Collection trends improved to ~98% in Mar’21, but declined 3–4% in Apr’21 due to the advent of the second COVID wave. We cut our FY22/FY23E earnings by 11%/6% and estimate credit cost to remain elevated at 4% over FY22. We maintain a ‘Neutral’ rating on the stock.

Higher interest reversal, elevated provisions cause earnings miss

* Bandhan Bank reported a weak quarter, with PAT of INR1.03b (significantly below estimates). It was impacted by higher interest reversal and elevated provisions of INR15.9b (93% YoY increase). FY21 NII/PPoP grew ~20%/26%, while PAT declined 27% YoY.

* NII was weak at ~INR17.6b (15% QoQ decline; below estimates), affected by interest reversal of INR5.4b due to higher slippages and interest-on-interest refunds. Thus, NIMs declined 150bp QoQ to 6.8%. Other income trends were strong and grew at 57% YoY, and opex grew ~24% YoY to INR8.1b. Therefore, PPOP was up ~14% YoY to INR17.3b (~10% QoQ decline; below estimates).

* Advances grew ~21% YoY (~8% QoQ), led by ~26% growth in the MFI book, while the Housing portfolio grew ~9% YoY. The share of the MFI portfolio stood at 67% of total AUM (v/s ~64% in FY20). Disbursements in the MFI portfolio grew 33.5% YoY (~61% QoQ), and Housing portfolio disbursements grew at 77% YoY. The total number of active borrowers in the MFI portfolio reached 12.3m (~11% YoY).

* Deposits were up 36.6% YoY to ~INR780b, led by ~61% YoY growth in CASA deposits to ~INR338b. The CASA ratio improved to 43.4% (v/s 42.9% in 3QFY21). The proportion of retail deposits stood at ~79%.

* On the asset quality front, the GNPA ratio improved to 6.81% (7.12% proforma in 3QFY21) and NNPA to 3.51% (2.36% proforma in 3QFY21). Thus, PCR plunged to ~50% (~67% proforma in 3QFY21). Slippages were elevated at ~INR22b; improvement in the GNPA ratio was aided by higher write-offs of INR19.3b. Collection efficiency (excluding arrears) improved to 98% in Mar’21 – collection trends are excluding NPAs and write-offs.

Highlights from management commentary

* Collection efficiency declined 3–4% in Apr’21. However, the collections decline in West Bengal was less than 3%.

* Nearly ~78% of customers were able to pay some installments in Mar’21 among the NPAs in the MFI portfolio.

* Total loans restructured stood at ~INR6.2b, predominantly in the Housing Finance portfolio, while ‘Nil’ restructuring was seen in the MFI portfolio.

Valuation and view

BANDHAN reported a weak performance, affected by elevated provisions and higher interest reversal. Although, business growth remained robust, with AUM growth of ~21%, and liability traction also held strong. On the asset quality front, slippages stood elevated, while higher write-offs resulted in sequential improvement in the GNPA ratio.

Total delinquencies for FY21 stood at ~9% of loans. Collection efficiency improved to ~98% in Mar’21, but declined 3–4% in Apr’21 on account of the second COVID wave and lockdowns in various states. Overall, we expect asset quality trends to remain under pressure; thus, we estimate credit cost at 4.0% of loans for FY22. We cut our earnings estimate by ~11%/6.0% for FY22/FY23. We maintain a ‘Neutral’ rating on the stock and revise TP to INR335/share (2.2x FY23E BV).

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