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Strong all-round performance; asset quality improves sharply

Business growth gathers pace; stress pool witnesses a decline

* BANDHAN reported a strong 4QFY22, with a PAT of INR19b (significant beat), led by robust NII and negligible provisions. CE (including NPA) improved to 95% in Mar’22 from 92% in Dec’21. Excluding NPA, CE improved to 99% in Mar’22.

* Asset quality saw a sharp improvement, with GNPA/NNPA down 435bp/135bp QoQ to 6.5%/1.7%, while PCR stood healthy ~75%. SMA overdue in the MFI book too moderated to 6.5% from ~11% in 3QFY22.

* The management has demonstrated a healthy progress in improving asset quality, while business growth has picked up sharply. We raise our FY23/FY24 earnings estimate sharply by 23%/17%, factoring in lower credit cost and a recovery in growth. We maintain our Neutral rating.

Margin improves 90bp QoQ to 8.7%; PCR healthy ~75%

* BANDHAN reported a 4QFY22 PAT of INR19b (significant beat), led by an improvement in operating performance and negligible provisions (INR47m). NII rose 20% QoQ (11% beat) on the back of a pick-up in loan growth and an improvement in margin, which expanded 90bp QoQ to 8.7%.

* Other income grew 38% YoY, aiding a 43% YoY growth in total revenue. PPOP rose 29% QoQ and 53% YoY to INR25.2b (significant beat), while C/I ratio fell to 28% v/s 31.3% in 3QFY22.

* AUM grew 12.9% QoQ and 14.1% YoY, with MFI loans/Housing portfolio growing by 7%/17% YoY. The share of the MFI portfolio moderated QoQ to ~63% of total AUM. In MFI, disbursements grew 13% QoQ to ~INR230b.

* Deposits rose 24% YoY to INR963b, though the CASA ratio moderated to 41.6% from 45.6% in 3QFY22. Retail deposits mix moderated to 77%.

* On the asset quality front, slippages moderated to INR13.7b v/s INR34b in 3QFY22. This, coupled with higher recoveries and write-offs, resulted in a sharp improvement in asset quality. GNPA/NNPA ratio moderated 435bp/135bp QoQ to 6.5%/1.7%, with PCR ~75.5%. Collection efficiency (excluding NPAs) in the MFI portfolio improved to 97% in 4QFY22, with 97%/93% efficiency for West Bengal/Assam. The outstanding restructured book fell to ~INR54b (5.8% of loans), while SMA overdue in the MFI portfolio contracted to 6.5% from ~11% in 3QFY22.

Highlights from the management commentary

* The EEB stress pool has declined to INR119b v/s INR170b in 3QFY22. Coverage on this book has increased to 58.5% v/s 54% in 3QFY22.

* Total slippages stood at INR13.7b in 4QFY22, with the EBB book at INR11.81b. Total recoveries and upgrades stood at INR23.85b in 4QFY22, with an EEB of INR22.04b.

* Advances are expected to grow at 20-25%, with Home loans slightly higher.

Valuation and view

BANDHAN has reported a strong all-round performance, with an improvement in collection efficiency aiding a sharp improvement in asset quality, while business growth has gathered pace. The management has guided at a continued improvement in asset quality and steady trends in loan growth. Collection efficiency, excluding NPA, has improved to 99% (in Mar’22), while SMA overdue has declined to ~6.5% from 11% in 3QFY22. Collection efficiency, including arrears, has increased to 150% in 4QFY22. We raise our FY23/FY24 earnings sharply by 23%/17%, factoring in lower credit cost and a recovery in growth. We maintain our Neutral rating with an increased TP of INR350 per share (based on 2.2x FY24E BV).

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