Bandhan Bank: ‘Buy’ with a revised TP of Rs 505

Bandhan Bank’s deviation from its track record (of resilience better than peers) due to state-specific events in its dominating geographies of Assam and West Bengal, has led to disappointment in collection efficiency (sub-90% in Jan), credit cost (>5.5% annualised) and pro forma GNPLs (at 7.12%). Key question, at this juncture, is to what extent near term state-specific disruption/uncertainty can challenge the longevity of superior growth/return business model. Unique, socially responsible, market-leading franchise housed under robust liability franchise with adequate capitalisation will aid in sufficient operating profit/assets at >6%, enough to absorb such interim shocks. Revising credit cost estimate factoring interim risks, we tweak earnings by 15%/12% for FY21/FY22E and BV by 5%. However, it can still churn 3.5%/20% RoA/RoE and 20% growth for FY22E that can sustain 3.7x PB multiple. Maintain ‘BUY’ with a revised TP of Rs 505 (earlier Rs 537). Key risks: Uncertainty on events unfolding up to elections in West Bengal and implementation of Assam State Bill can weigh on interim valuations.

Operations in Assam – what will be the game plan: Bandhan has been treading cautiously in Assam – share is down to 14% in MFI portfolio (from 17%). Uncertainty around state government bill for MFI-lending has created moral hazards, impacting borrowers’ repayment behaviour. Consequently, collection efficiency in Assam has plunged from 88% in Dec’20 to 78% Jan’21 (MTD). Till the time stability returns, incremental disbursements will be limited in the state. Also, alluding to such behaviour, 15-20% drop in collection efficiency can translate to 1.2-1.5% additional credit cost. West Bengal – polls around the corner but should that be a cause of concern. Bandhan has the highest EEB portfolio in WB – collection efficiency there is holding up at 89% for January MTD (albeit a dip from 90% in Dec’20).