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

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%).

Bandhan Bank: ‘Buy’ with a revised TP of Rs 505
Till the time stability returns, incremental disbursements will be limited in the state.

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).

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