Q2FY20 was strong with PAT of ~Rs 9.7 bn (up 99.3% y-o-y; merged financials of Bandhan + GRUH) led by strong AUM growth (up 92.3% y-o-y; ~38% y-o-y standalone). Traction visible in deposits (retail share at 78%, CASA ~33%), customer acquisition (added 1 mn in Q2, total 18 mn+) and stable NIM at 8.2% despite 30% AUM share of mortgages. Asset quality was stable (GNPA/NNPA: 1.76%/ 0.56%).

Management remains confident of market opportunity, ability to cross-sell, harness benefit from GRUH merger and retain growth rate above 30% while generating superior return ratios. We maintain our positive stance on the stock and revise TP to `690 factoring in a diversified loan book, RoA above 4.5% and pristine asset quality. Inclusion in MSCI index is a positive for the stock.

Q2FY20 highlights

(i) Total AUM (on-book + off-book) grew 92.3% y-o-y to `641.8 bn. Excluding GRUH, AuM growth came in at 37.7%. Of total advances, micro banking portfolio grew 35.3% y-o-y to `392 bn. Non-micro portfolio included GRUH portfolio of Rs 182.3 bn, taking the mix for micro to non-micro advances to 61:39; (ii) 1 mn customers added during Q2 with total customer base reaching 18.3 m; (iii) Deposits grew 49.3% y-o-y (46.5% y-o-y excl. Gruh) with CASA ratio at 33% (excl. GRUH term deposits CASA at 35%, dipped ~100 bps q-o-q).

Q2FY20 concall highlights

Gruh merger to add value: The management has selected ~106 branches of the existing 1,000 branches of Bandhan to roll out the mortgage product. (GRUH has ~195 branches).

Hiring and training of employees for the same has started. Almost 50% of the high cost borrowings of GRUH have already been reprised by Bandhan. This was also putting a burden on NIM as both entities were carrying excess liquidity (~`7 bn). Liquidity coverage ratio as of Sep 2019 was at ~225%.

Bandhan management sees no signs of overleverage in any region. Teams visit DSCs/group meetings at least twice a month to keep a close tab. MFI customers are not pushed for deposits as only 5.7% of total deposits are from MFI customers.

Average monthly of MFI customers as per management’s assessment is ~`38,000 and the average loan amount is `68,000 with 54% of customers being such that Bandhan is a sole lender to them.
Maintain Buy with revised TP of Rs 690

We have incorporated GRUH numbers in our FY20/21 estimates; consequently, revise the TP to `690 factoring in a diversified loan book (larger share of secured loans), adequate capitalisation (Tier I at 23%), reduced cost to income of 30.8%, benefits from corporate tax rate reduction and stable asset quality. We believe that Bandhan has ample room for growth with opportunities for cross-selling and harnessing operating leverage from existing infrastructure. At CMP, the stock trades at 4.7x FY21e ABV/~19x PE.