Bandhan Bank’s earnings ought to, in our read, double FY21-23 to Rs 53bn with a pick-up in disposition & halving of credit prices. Diversification of loans & deposits with parents obtrude upon NLFs would strengthen franchise & meet laws. we tend to expect ROEs to rise by 700bps to c.22% when the bank builds buffers to stay credit prices at c.2% of avg. loans. These ought to drive rerating. we tend to initiate coverage with a purchase and value target of Rs 470 on 3x Mar23 adj. PB.
Clouds of uncertainty to clear; growth to select up. We tend to believe that overhang on Bandhan Bank’s growth and quality would be self-addressed by 1QFY22 as clarity on waivers & impact of recent norms in Assam emerge, tally problems, harmonious norms and assortment efficiencies in microloans improve.
Bandhan Bank should be able to manage the transition to RBI’s new norms, and residual credit costs on microloans are likely to be manageable in the range of Rs 11bn-31bn (5-13% of net worth), accommodated by Tier I CAR of 21% and PPOP/ avg assets of +6%.
In microfinance, its growth in new states and individual-lending sections might facilitate growth and tide-over caps on individual borrowing limits. Its deposit franchise has scaled-up well (CASA magnitude relation at 36%) and that we see headroom for it to lower prices and gain share in current deposits (especially because the Govt. has opened agency business to new banks). The group’s planned intrusion on the insurance/ open-end investment company business (non-lending financials) will strengthen the whole and add fee sources for the bank. Earnings to rebound.
Valuations attractive; initiate with obtain. Bandhan Bank has underperformed lenders and trades at a thirty-fifth discount to its historical 3-year average (since IPO). The key risks to earnings & valuations are worse-than-expected losses and tighter norms in a state or obligatory by tally. The upper side may arise from stronger disbursements/topline & higher plus quality. Also, the rebound in earnings and diversification of companies may support valuations rising on the far side historical average. We tend to initiate coverage with an obtained rating and a value target of Rs 470 supported 3x Mar-23 adjusted lead.
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