On the back of trimming our loan growth estimates, we fine-tune our target price downwards by 7% to Rs 814, representing a yet robust 56% upside, meriting a ‘buy’ rating on the stock.
With three one-offs impacting profits, Bandhan Bank’s Q3 PAT came in 15% below our estimates, but is set to reverse in the current quarter as the one-offs appear to be transitory. These included, slowdown in micro lending growth momentum to 30% (is that a slowdown?) due to some caution exercised in the N-E, given the political situation, opex increases due to the Gruh merger (an accounting change in fees payable to lenders) and one-time Rs 200-crore provisioning on standard assets pertaining to its exposure in one N-E state (where on-time repayments are normalising; past disruptions have seen similar return to normalcy). On the back of trimming our loan growth estimates, we fine-tune our target price downwards by 7% to Rs 814, representing a yet robust 56% upside, meriting a ‘buy’ rating on the stock.
The analyst call was a positive event (similar to Q2) yielding several new disclosures as well as the conservative provisioning policy of the management. Merged loan book grew an estimated 19% on a comparable basis year-on-year, which we expect will bounce back in coming quarters as disruptions in the N-E subside. A technical increase in NPLs due to accounting standards applicable to Gruh’s book under Indian GAAP (vs IndAS earlier) saw margins dip 20 bps quarter-on-quarter to 7.9% as also due to excess liquidity maintained to repay Gruh’s borrowings — both factors unlikely to recur. Accounting-related changes in the opex line (mentioned above) saw operating profits grow 22% y-o-y.
After taking an additional Rs 200-crore provisioning on standard loans in the Assam book, credit costs were at ~190 bps with gross NPAs rising to 1.9% and coverage ratio dipping to 58% vs 68%, sequentially. Given the large provisioning taken last year on account of IL&FS as well as the lower tax rate, reported PAT growth remained robust at 71% y-o-y. We cut our earnings estimates by 3% in FY21E and 13% in FY22E mainly on the back of lower loan growth as we remain conservative vs our earlier stance and yet expect the bank to report RoAs of 3.8-4% on merged basis over FY20-22E. The stock trades at a P/E of 18x and P/BV of 3.6x on FY21E basis vs its historical average of 5.2x. We trim our TP to Rs 814, representing an upside of 56%. We reiterate our ‘buy’ rating.