Buy Bandhan Bank Ltd for Target Rs.220 by Elara Capital
Strong end to FY26, durability key
Bandhan Bank (BANDHAN IN) reported a strong Q4FY26, with improvement across key metrics. While NII was in line with expectations (up 4% QoQ), lower-than-expected credit cost fed into PAT beat (at INR 5.3bn, up >65% YoY). The key highlights were: a) improving growth momentum (improvement across key segments), which with better NIMs supported 4% QoQ NII growth, b) controlled slippages, with larger improvement driven by the EEB portfolio, and c) while SMA-0 has improved, stickiness of SMA-1 & SMA-2 pool warrants a watch.
Discussion will center on: 1) asset quality outcome, especially given elections in dominant states even as concerns around MFI stress may be waning (management indicating no material impact seen so far on collections), 2) durability of growth outcomes, and 3) impact of ECL transition. While performance has been strong, Q4 is generally a seasonally robust quarter, so we await further datapoints to call this a trend. Nonetheless, industry datapoints do suggest that MFI is at an inflexion point, which will pose upside risk to our estimates. Given improving predictability and industry outlook, we raise our target multiple to 1.2x (from 1x) which with roll over to FY28E feeds into a revised TP of INR 220 (from INR 186) – BUY.
Strong asset quality print, we await further datapoints to call this a trend: Q4 saw better asset quality outcomes, with slippages at INR 10.3bn (down >20% QoQ). The improvement was largely led by MFI slippages, while other segments have seen some improvement. While SMA pool has improved, the volatility in SMA-1 & SMA-2 book warrants a watch, thus keeping us on guard. Management articulated about better flows recently, but data points are limited to draw any conclusion. Moreover, impending elections in some larger operating states may feed into further volatility, even as the outcomes till date have been much better
NIMs better; core performance, key to re-rating: Q4 saw improved loan growth (with ~50% of FY26 incremental growth in Q4 and secured mix at ~56%), alongside a 10bps QoQ rise in NIM to 6.12%, supporting 4% QoQ NII growth. However, higher opex (driven by PSLC and technology costs, including ~INR 600mn PSLC expense) weighed on core profitability. NIM outlook is supported by expected 10–20bps reduction in funding cost and improving mix, partly offset by portfolio transition. Other income is aided by better processing fees and cross-sell, while opex may normalize with lower PSLC costs. Thus, we would continue to monitor cost outcomes. Overall, these trends should support a gradual improvement in RoA in the medium term.
Maintain BUY; TP raised to INR 220: Volatile financial performance and uncertainty around operating environment hit investor confidence. However, recent industry trends do indicate a potential inflexion point, thus making a case for further rerating. We continue to be guarded and have broadly similar FY27E/FY28E earnings, but see some upside risk to earnings. We thus Maintain BUY with a revised TP of INR 220 (earlier INR 186), on 1.2x FY28E P/BV. We see investors waiting for impending elections across some prominent states but outcomes thus far have been better. We introduce FY29E estimates.
Please refer disclaimer at Report
SEBI Registration number is INH000000933
