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PPoP in line; higher write-off drags down earnings

Margins expand 40bp QoQ to 7.6%

* Bandhan Bank (BANDHAN) posted 4QFY24 PAT of INR546m (94% miss) due to higher provisions as the bank has technically written off bad loans pertaining to pending CGFMU claim as a prudent measure. NII grew 16% YoY to INR28.7b (7% beat) as margins expanded 40bp QoQ to 7.6%.  

* Advances grew at a healthy 15.6% YoY/9.9% QoQ. MFI share in the total loan book stood at 50%, with the o/s book size at ~INR622b. Deposit growth was robust at 25% YoY/15% QoQ with CASA mix of 37.1%.  

* GNPA/NNPA ratios improved 318bp/110bp QoQ to 3.8%/1.1%, while slippages improved to INR10b vs. INR13.9b in 3QFY24. MFI-SMA book declined 130bp QoQ to 2.0%, which will enable lower a slippage rate going ahead. Collection efficiency was steady at 99%.

* We cut our earnings estimates for FY25/FY26 by 6.8%/7.1% and expect FY26E RoA/RoE at 1.8%/16.4%. Retain Neutral with a TP of INR200 (1.3x FY26E ABV).  

Business growth healthy; MFI SMA book declines to 2%

* BANDHAN reported a 94% miss on PAT at INR546m as the bank has technically written off bad loans pertaining to pending CGFMU claim as a prudent measure.

* NII grew 16% YoY to INR28.7b (7% beat). Margins expanded 40bp QoQ to 7.6%. Other income grew 10% YoY/up 27.3% QoQ to INR6.9b (in line), resulting in 14.8% YoY growth in total revenues (6% beat).

* PPoP grew 2.4% YoY/ 11% QoQ to INR18.4b (in line) as opex rose 32% YoY to INR17b (12% higher than MOFSLe) due to one-off expenses of INR1.15b.

*Advances grew at a healthy rate of 15.6% YoY/9.9% QoQ. EEB book grew 10.2% YoY (8.1% QoQ), whereas non micro credit book grew 19.4% YoY (7.1% QoQ). EEB portfolio is expected to grow at 15% YoY. The management provides 17-20% credit growth guidance for next 2-3 years.

* Deposit grew at a robust 25% YoY/15% QoQ, driven by 18.3% QoQ growth in CASA deposits. CASA ratio, thus, improved 97bp QoQ to 37.1%.  TD growth was healthy at 29.6% YoY/ 13.4% QoQ, in which retail TD grew 26.6% YoY/5.8% QoQ.  

*GNPA/NNPA ratios improved 318bp/110bp QoQ to 3.8%/1.1%, while slippages improved to INR10b vs. INR13.9b in 3QFY24. SMA book declined 130bp QoQ to 2.0%. PCR increased to 71.8%.

* With respect to CGMFU claim, the bank expects the audit to be completed in 1QFY25 and expects the claim to get passed. However, as a prudent measure, the bank has technically written off the underlying bad loans, and the approved claim would be accounted for only on receipt. We remain watchful of developments here. 

Highlights from the management commentary

* One-off items in opex included: 1) capital WIP cost, which was capitalized, led to higher depreciation amounting to INR0.5b; 2) the bank has to run certain parallel system, leading to additional expenses of INR0.3b; 3) fair value of stock options at INR0.22b.

* 17-20% of credit growth guidance for the next 2-3 years; the bank aims faster deposit growth vs. advances growth.

* INR9.70b of tranche-1 of claim was received earlier, and 2nd tranche of claim is pending, and subsequent to the notice, a detailed audit is being done.

* INR0.6-0.8b of ARC recovery is expected every quarter, including the provisioning release.  

Valuation and view

BANDHAN reported a mixed quarter as earnings came in below our estimate due to higher provisions, but business growth improved in a seasonally strong quarter and margins expanded 40bp QoQ. However, higher opex kept the C/I ratio elevated. SMA book declined 130bp QoQ to 2.0%, while CE remained steady at 99%. Slippages declined to 3.6% (annualized), and with the quantum of stressed assets declining sharply, we estimate the delinquency trend to improve going further. While the bank has made full provisions for bad loans pertaining to CGFMU claim and expects the audit to be completed by Jun’24, we remain watchful on the same and also the appointment of new CEO as Mr. Ghosh’s term ends in Jul’24. We cut our earnings estimates for FY25/FY26 by 6.8%/7.1% and estimate FY26 RoA/RoE at 1.8%/16.4%. Retain Neutral with a TP of INR200 (1.3x FY26E ABV). 

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