Bandhan Bank’s earnings ought to, in our view, double over FY21-23 to Rs 53bn with a pick-up in lending & halving of credit score prices. Diversification of loans & deposits with mum or dad’s foray into NLFs would strengthen franchise & meet rules. We anticipate ROEs to rise by 700bps to c.22% even because the financial institution builds buffers to maintain credit score prices at c.2% of avg. loans. These ought to drive rerating. We provoke protection with Buy and price target of Rs 470 on 3x Mar23 adj. PB.
Clouds of uncertainty to clear; development to select up. We consider that overhang on Bandhan Bank’s development and asset high quality could be addressed by 1QFY22 as readability on waivers & impression of latest norms in Assam emerge, RBI points harmonized norms and assortment efficiencies in microloans enhance.
We assume that the tightening of guidelines/ impression of waivers in Assam won’t be disruptive, put up elections in Assam and West Bengal, the overhang on two key states (c.40% of loans) might be set for five years, Bandhan Bank ought to be capable to handle transition to RBI’s new norms, and residual credit score prices on microloans are prone to be manageable within the vary of Rs 11bn-31bn (5-13% of web price), accommodated by Tier I CAR of 21% and PPOP/ avg belongings of +6%.
Hence, we see the halving of credit score prices enhance disbursements from FY22. Diversification ought to strengthen franchise. The financial institution is diversifying its presence throughout segments. On the lending aspect, it might leverage alternatives in reasonably priced housing (25% of loans now), with aggressive funding prices & wider community.
In microfinance, its growth in new states and individual-lending phase might assist development and tide-over caps on particular person borrowing limits. Its deposit franchise has scaled-up nicely (CASA ratio at 36%) and we see headroom for it to decrease prices and acquire share in present deposits (particularly because the Govt. has opened company business to new banks). The group’s deliberate foray into the insurance coverage/ mutual fund business (non-lending financials) can strengthen the model and add price sources for the financial institution. Earnings to rebound.
We anticipate earnings to rebound put up 1HFY22 as credit score prices fall from 5% of common loans in FY21 to c.2% over FY23-24 and uptick in disbursements helps mortgage development of 25%. Hence, we see enchancment in earnings from Rs 24bn in FY21 to Rs 53bn in FY23 and estimate ROEs to rise to c.23% in FY23 even because the financial institution builds buffers that maintain credit score prices at c.2% of avg. loans vs. FY15-20 common of 1.2%. Our interactions with mgt. in addition to channel checks point out that the business ought to see normalcy set in quickly.
Valuations engaging; provoke with Buy. Bandhan Bank has underperformed lenders and trades at a 35% low cost to its historic 3-year common (since IPO). The key dangers to earnings & valuations are worse-than-expected losses and tighter norms in Assam or imposed by RBI. Upside might come up from stronger disbursements/prime line & higher asset high quality. Also, the rebound in earnings and diversification of companies might assist valuations rising past historic common. We provoke protection with a Buy score and a price target of Rs 470 based mostly on 3x Mar-23 adjusted PB.