Asset quality deteriorates; CE remains key monitorable: Bandhan Bank reported 1QFY22 PAT of Rs 3.7billion, above our estimate — supported by margin improvement (170bp QoQ) and lower provisions v/s MOFSLe– even as MFI loans / total AUM declined 9%/~8% QoQ. On the liability front, the CASA ratio came in stable at ~43%, while the proportion of retail deposits improved to ~83% (v/s 79% in FY21). Slippage was elevated at Rs 16.8billion (annualised slippage ratio of ~9%), with MFI slippage at ~Rs 10.4billion. Therefore, the GNPA ratio increased 137bp QoQ to ~8.2%. Provisions were elevated, with annualised credit cost at 7.2% of loans. Thus, the provision coverage ratio (PCR) improved to ~62% of loans (v/s 50% in FY21). The restructured book increased sharply to ~Rs 53billion (6.6% of total AUM). SMA loans surged to 21%, while a large portion of the SMA overdue in Assam was eligible for a relief package. As a result, LGDs would remain controlled. Collection efficiency (excluding NPAs) in the MFI portfolio stood at 86% (~85% for West Bengal) and remains a key monitorable in the near term. Overall, asset quality remains uncertain, and we estimate credit costs to remain elevated at 5.5% of loans for FY22 (similar to FY21 levels). Maintain ‘neutral’, with revised TP of Rs 330 (2.4x FY23 ABV).
Restructured portfolio grows to 6.6% of AUM; PCR improves to ~62%: Bandhan Bank reported PAT of Rs 3.7billion (v/s estimate of Rs 1.8billion) despite elevated provisions of Rs 13.7billion (annualised credit cost at 7.2% of loans). NII growth came in at 17% YoY (4% above estimate) despite sequential decline in AUM growth (~8% QoQ), supported by 170bp QoQ expansion in margins to 8.5%. Other income grew 38% YoY, supported by a benign base. PPOP, thus, grew ~18% YoY to Rs 18.7billion (5% beat). AUM declined ~8% QoQ (up 8% YoY) on ~9% QoQ decline in the MFI portfolio and 4% QoQ decline in the housing portfolio. The share of the MFI portfolio stood at ~66% of total AUM (v/s ~67% in FY21).
On the asset quality front, slippage stood elevated at Rs 16.8billion (annualised slippage ratio of ~9%). Therefore, the GNPA ratio increased 137bp QoQ to ~8.2%, while the NNPA ratio declined 22bp QoQ to 3.29%. Provision coverage improved to 61.8% (v/s 50.3% in FY21).
Highlights from management commentary: Slippage from the MFI portfolio was ~Rs 10.4billion, with recoveries and upgrades of Rs 5.1billion. At the portfolio level, total slippage stood at Rs 16.8billion, while recoveries and upgrades at ~Rs 10billion. The bank has availed CGFMU (a guarantee from the central govt) on the total portfolio of Rs 143billion. Nil disbursements were made in Assam during the quarter. Also, there were nil disbursements under the credit guarantee scheme.
Valuation and view: Bandhan Bank reported higher-than-estimated PAT, supported by margin expansion. This was despite elevated slippages/provisions due to (a) the second Covid wave (which severely impacted the MFI sector) and (b) the disturbance in credit culture due to loan waivers. Restructuring/SMA overdue in the MFI book increased sharply. Provision coverage increased to ~62%. which gives us some comfort. Collection efficiency in the MFI portfolio stood at 86%, with 85% for West Bengal — closer to the rest of India. Overall, asset quality remains uncertain as the pool of restructured/SMA overdue remains high. Thus, we estimate credit cost to remain elevated at 5.5% of loans for FY22 (similar to FY21 levels). Maintain ‘neutral’, with revised TP of Rs 330 (2.4x FY23 ABV).