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Asset quality deteriorates; collection efficiency in Assam witnesses a sharp decline

Liability traction remains robust

* BANDHAN reported a weak quarter, with net earnings falling sharply below estimates, affected by provisions of INR10b predominantly towards rising asset quality concernsin the Assam portfolio. However, operating performance remains strong, led by higher NII as margin improved 30bp QoQ, while AUMs grew at 23% YoY. Liability traction was robust at 30% YoY.

* On the asset quality front, the pro-forma GNPA/NNPA ratio increased to ~7.1%/2.36%, with 0dpd of ~76.5%. Collection efficiency in Assam dropped by 1,000bp to 78% during 1-16 Jan’21. We raise our credit cost estimate for FY21E/FY22E to 4.4%/2.6% and downgrade our rating to Neutral.

Higher provisions drive earnings miss; business momentum remains strong

* 3QFY21 PAT stood at INR6.3b (13% YoY decline; ~32% below our estimate) as provisions increased ~170% QoQ to INR10.7b as the management made COVID-related provisions of INR10b. BANDHAN holds total COVID-related provisions of INR27.4b (~3.6% of loans or ~5% of MFI loans).

* NII grew 35% YoY to INR20.7b (6% beat) as NIMs improved by 30bp QoQ to 8.3%. Other income trends were also strong and grew at 55% YoY, while opex grew 12% YoY to INR7.1b. PPOP grew 51% YoY to INR19.1b (15% beat). For 9MFY21, PPOP grew at 31% YoY, while PAT declined 16% YoY.

* Advances grew ~23% YoY (~5% QoQ), led by ~32% growth in the MFI book. The Mortgage portfolio growth remained muted. The share of MFI portfolio stood at 66% of total AUM (v/s ~65% in 2QFY21). Disbursements in the MFI portfolio grew at 14% YoY (59% QoQ), while the Housing portfolio grew at 29% YoY. Total number of active borrowers in the MFI portfolio touched 11.3m (7.6% YoY).

* Deposits grew 30% YoY to INR712b, led by ~62% YoY growth in CASA deposits to ~INR305b. CASA ratio improved to 42.9% (v/s 38.2% in 2QFY21), while the proportion of retail deposits increased to ~81%.

* On the asset quality front, the pro-forma GNPA/NNPA ratio increased to ~7.1%/2.36%, (v/s ~1.1%/0.3% at present) due to increasing challenges in core geographies: Assam and West Bengal. Collection efficiency in the MFI portfolio declined to ~90% as of 16 Jan’21 (~92% as of Dec’20). Among states, collection efficiency in Assam dropped to 78% as on 16 Jan’21 (88% during Dec’20). However, collection trends in the Affordable Housing and Commercial Banking portfolio stood stable at 98%.

Highlights from the management commentary

* Around 80% of the customers are making full payments, while 13% are making partial payments. About 76.5% of total portfolio are in the ‘0’ dpd category.

* Credit cost for FY21E increased to 5% (v/s 3.5% guided earlier) due to rising concerns in the Assam region.

Valuation and view

BANDHAN reported a sharp deterioration in asset quality trends, with pro-forma GNPA ratio increasing to ~7.1%, while collection efficiency in the MFI portfolio in its core state of Assam has witnessed a sharp decline. The bank has made higher COVID-related provisions of INR10b during 3QFY21, pre-dominantly towards rising stress in Assam, thus taking additional provisions to 3.6% of loans to manage higher delinquencies in coming quarters. Operating performance remains strong and continues to demonstrate strong deposit performance, led by retail deposits. We cut our earnings for FY21E by 22% to factor in higher credit cost at 4.4%/2.6% for FY21E/FY22E. We downgrade our rating to Neutral on rising asset quality concerns and revise our TP to INR370/share (2.5x Sep’22E BV).

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