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Deteriorating asset quality, cautious outlook

Bandhan Bank operates as a commercial bank, offering checking accounts, savings deposits and money market, mortgage, and term loan services, in addition to card facilities and internet banking services.

• In Q2FY24, net interest income (NII) came in at Rs 2,443cr. Net interest margin expanded 20bps to 7.2%.

• GNPA/NNPA ratios stood at 7.3% / 2.3% (vs. 6.8% and 2.2% in Q1FY24).

• We expect advances and deposits to grow at a better rate, driven by the festive season. Strategic expansion, digitalisation and a diversified loan portfolio auger well for the company’s long-term performance. However, we remain cautious in the near term owing to its worsening asset quality and reduce our rating on the stock to ACCUMULATE, with a revised target price of Rs. 246, based on a 1.45x FY25E BVPS.

PAT more than triples YoY due to lower provisioning

In Q2FY24, interest income grew 19.0% YoY to Rs. 4,492cr, driven by robust growth in interest on advances (up 19.1% YoY). Interest expense rose 29.6% YoY to Rs. 2,049cr. As a result, NII came in at Rs. 2,443cr (up 11.4% YoY). NIM margin expanded 20bps YoY to 7.2%. Pre-provisioning profit was Rs. 1,583cr (up 2.0% YoY), impacted by higher operating expenses (up 25.4% YoY). However, profit after tax more than tripled YoY to Rs. 721cr, aided by lower provisioning (down 50.3% YoY), partly offset by higher taxes

Asset quality deteriorates further

Total advances grew 12.3% YoY to Rs. 107,630cr (up 4.3% QoQ). Advances to the Emerging Entrepreneurs Business (EEB) segment remained flat YoY, while housing loan book reported muted growth of 3.7% YoY. The commercial banking segment, however, recorded 64.8% YoY growth. Deposits increased 12.8% YoY to Rs. 112,080cr (3.3% QoQ). The CASA ratio expanded 250bps QoQ to 38.5%. Gross non-performing assets (GNPA) came in at Rs. 7,874cr (up 13.1% QoQ), impacted by elevated slippages at Rs.1,320cr. GNPA and NNPA ratios were 7.3% and 2.3% (vs. 6.8% and 2.2% in Q1FY24), respectively. The provision coverage ratio stood at 70.0%. The capital adequacy ratio was 19.2% and the Tier-I was 18.2%, well above the required level.

Key concall highlights

• The bank added 1mn customers (reaching 31.7mn) and 79 branches (totaling 1,621) in Q2FY24.

• Collection efficiency (incl. arrears) improved to 110.0% during the quarter, as against 107.0% in Q1FY24.

• Monthly active users on the digital banking platform increased 57.0% YoY

Outlook and valuation

The management had initially guided advances to grow 20.0% and deposits to increase at an even higher rate than advances in FY23. However, advances and deposits grew way below expectations, with hardly any growth in the core EEB segment in Q2FY24. Asset quality deteriorated further, owing to higher slippages from EEB at Rs. 1,000cr. Going forward, we expect advances and deposits to grow at a better rate, driven by the festive season. Asset quality is likely to improve, aided by better recoveries and moderation in slippages. The company expects NIM to be in the 7.0-7.5% range, with higher yields compensating for an increase in cost of deposits. Continued investments in people, infrastructure and technology auger well for the company’s performance in the long term. However, due to its subpar performance in Q2FY24, we remain cautious in the near term and hence, downgrade our rating on the stock to accumulate, with a revised target price of Rs 246, based on a 1.45x FY25E BVPS.

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SEBI Registration Number: INH200000345