Bandhan Bank‘s performance in Q1FY24 was relatively weak, although their PAT exceeded estimates due to significantly lower credit costs (2.6% compared to our estimated 3.8%). However, this improvement was accompanied by a sharp decline in the provision coverage ratio (PCR), which stood at 69% in Q1FY24, down from 77% in Q4FY23. The bank experienced a notable increase in non-performing loans (NPLs) during the quarter, with Gross NPLs at 6.8% compared to 4.9% in 4QFY23. This increase was partially impacted by a one-off event related to the reclassification of government-guaranteed ECLGS loans. Even after adjusting for this, GNPLs remained elevated at 6.2%.
Furthermore, Bandhan Bank’s headline loan growth remained weak, with gross loans increasing by 7% y-o-y and decreasing by 6% q-o-q. The microfinance segment experienced a significant decline of 12% y-o-y. While it is typical for Q1 to exhibit lower collections and higher delinquencies, Bandhan Bank’s elevated slippages and decline in PCR raise concerns about the asset quality.
In light of these factors, we have revised our earnings estimates downward by 11-14% for FY24-26, primarily driven by a weaker top line. Consequently, we now anticipate Bandhan Bank to achieve 18-19% RoE during FY24-26, compared to our previous projection of 20-21% RoE. To reflect the lower sustainable RoE, we have adjusted the valuation multiple to 1.5 times Jun-25F Book Value per Share (BVPS), down from 1.7 times earlier. As a result, our revised TP is 270, down from325.
Bandhan saw elevated slippages of Rs 19 billion in Q1FY24, although this included one-off NPLs due to re-classification of loans under the government guaranteed ECLGS scheme. However, even adjusting for this, slippages were elevated at 6%, despite collections remaining broadly stable q-o-q at 98%.
We have cut our overall loan book estimates by 3% across FY24-26F for Bandhan, and this is one of the key drivers for our earnings cuts. Bandhan needs a sustainable pick-up in its growth trajectory for any material rerating to play out, in our view.