Buy Bandhan Bank; target of Rs 425: Emkay Global Financial

Emkay Global Financial's report on Bandhan Bank

Bandhan reported PAT of Rs9.2bn, significantly beating the estimate of Rs6.6bn, mainly due to lower opex and contained provisions as the heavy-lifting in terms of Covid-19-related provisions has largely been done. After additional Rs3bn Covid-19 provisions in Q2, the cumulative provisioning buffer stands strong at Rs17.4bn (2.3% of overall AUM/3.5% of MFI AUM). Overall collection efficiency (CE) in value terms improved to 91% in Oct’20 from 68% in Q1, and in customer terms to 95% vs. 67%, but improvement from Sep’20 levels has been relatively moderate due to some drag in Assam/WB. It expects CE to improve further in Nov/Dec’20 and believes that the current provisioning buffer should be largely sufficient to offset residual pain. The bank has unveiled a5-year asset diversification plan, with the share of MFI at 30% (vs. 62% now) and SME/mortgages each at 30%, which may affect blended loan yields. However, the bank has built a strong CASA base and is expanding in non-eastern markets to tap low-cost retail deposits, which should help protect margins in the long run.

Outlook

We like Bandhan Bank for its strong liability franchise, steady asset diversification strategy, recent moves to deepen management bandwidth and ability to manage asset quality disruptions across cycles with proactive provisioning strategy. Retain Buy/OW in EAP with a revised TP of Rs425 (based on 2.7x Dec’22 ABV).

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