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Bandhan reported a steady quarter with PAT at INR 10.6bn (+47.5% QoQ) on the back of a) healthy growth in NII (+20.7% YoY, +4.8% QoQ, +4.5% JMFe), b) moderation in opex growth (-7.6% QoQ, +21.2% YoY), and c) lower than expected credit costs at 1.9% (vs 2.55% YoY). One notable development during the quarter was a sharp reduction in CRAR to 15% (vs 18.3% QoQ) which mgmt. explained was due to the impact of adjustment in risk weights for EEB book from 75% to 125%. Mgmt. explained that this was a precautionary measure undertaken by the board in response to the RBI's Nov ‘23 circular, which did not specifically address the risk weights for MFI portfolios of banks. They emphasized that this increase was implemented on a conservative basis to ensure prudent risk management. Additionally, mgmt. assured that bank remains well-capitalized and is well-positioned to seize further growth opportunities despite these adjustments. Asset quality metrics remained steady with GNPA/NNPA at 4.2%/1.1% (+4bps QoQ/flat QoQ). Collection efficiency (excl. NPA) saw a marginal decline to 98.7% (vs 98.8% QoQ) which was attributed to the impact of severe heat waves and operational limitations due to general elections. We believe key catalysts for a potential re-rating will be a) clarity on the appointment of a new MD/CEO and b) impending CGFMU audit outcome (mgmt. remains confident of a positive outcome as it nears closure). As fundamentals for the bank continue to be on the mend, we expect RoA/ROE of 2.15%/17.7% by FY26E. Maintain BUY with a TP of INR 260 (valuing it at 1.4x FY26E BVPS).

* Growth remains soft: Growth in net advances remained modest at (+23.8% YoY, 0.4% QoQ) reflecting typical seasonality. However, retail segment witnessed a robust growth of (+11.6% QoQ, +84.9% YoY), followed by NBFC-MFI segment at (+8.2% QoQ, +25.8% YoY) and EEB book at (+20.7% YoY, -0.5% QoQ). Mgmt. anticipates a pick-up in business momentum in the coming quarters, with growth in the secured book expected to surpass that of the EEB segment. Mgmt. reiterated growth guidance of 18-20% for FY25. Deposit growth remained subdued at (+22.8% YoY, -1.5% QoQ) with CASA ratio declining to 33.4% (vs 37.1% QoQ). Despite this, the share of retail deposits held steady at 69% (flat QoQ). Mgmt. remains optimistic that deposit growth will exceed loan book growth in the upcoming quarters. We forecast net advances to grow at a CAGR of 17% over FY24-26E

* Steady operating performance: Operating profit stood at INR 19.4bn (+24.2% YoY, +5.6% QoQ) driven by a) strong growth in NII (+20.7% YoY, +4.8% QoQ, +4.5% JMFe), b) robust growth in other income (+37% YoY, -24% QoQ), and c) moderation in opex growth (-7.6% QoQ, +24.2% YoY). Despite a competitive deposit environment in the banking industry, Bandhan was able to limit an uptick in CoF to 7% (+1bps QoQ), as result of which margins held steady at 7.6% (flat QoQ). As the AUM mix tilts in favour of secured products, margins are expected to remain under pressure, however, mgmt. remains confident of sustaining margins in the range of 7-7.5% going ahead.

* Stable asset quality parameters: Headline asset quality metrics remained steady with GNPA/NNPA at 4.2%/1.1% (+4bps QoQ/flat QoQ). Collection efficiency (excl. NPA) saw a marginal decline to 98.7% (vs 98.8% QoQ) which was attributed to the impact of severe heat waves and operational limitations due to general elections. As a result of this, SMA 0 edged up slightly to 0.9% (vs 0.6% QoQ). However, we believe this is transient in nature and should normalise in the coming quarters. Credit costs stood at 1.9% (vs 2.55% YoY) with PCR at a healthy ~74%. We build in avg. credit cost of 2.35% over FY25E/26E

* Valuation and view: Bandhan’s return metrics continue to be on the mend aided by consistent growth and steady operating performance. Stock currently trades at inexpensive valuations of 1x FY26E BVPS. We believe key catalysts for the stock to re-rate would be a) CGFMU audit outcome (mgmt. remains confident of a positive outcome as it nears closure) and b) clarity on the appointment of a new MD/CEO. We maintain BUY with a TP of INR 260 (valuing it at 1.4x FY26E BVPS) in return for RoA/ROE of 2.15%/17.7% by FY26E

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