Buy Bandhan Bank For 26% Upside Or Rs. 415 Target Price: Edelweiss

Edelweiss Wealth Research has given a 'Buy' call on Bandhan Bank for a target of Rs. 415 i.e. an upside of 26% from the current market price of the stock of Rs. 330.25 per share on the NSE.

Faster growing mid-scale bank before the pandemic

Before the outbreak of the pandemic, Bandhan Bank stood as the fastest growing bank and reported a CAGR of 42% in credit growth over FY16-20 (in terms of organic growth). However, following the start of the pandemic, credit growth dropped to 12% between Q4FY20 and Q3FY22. Though assets side got impacted, bank continued to maintain a strong growth trajectory on the deposits front. So, as with the higher credit costs and low loan growth, the bank's RoE and RoA got hurt severely with RoA and RoE dropping to 2.2% and 13.5% in FY21 from a peak of 4.5% and 28.6% in FY17.

Brokerage's take on the lender:

Edelweiss is of the view that Bandhan Bank which faced such hardships given the Covid woes and state-related issues they are behind it now. As there is pick up in economic activity and the state related issues have settled , there is believed that credit growth as well as asset quality issues have gone down.

Rationale for a 'Buy' on Bandhan Bank as given out by the brokerage:

Asset quality to only improve:

Bank has far high presence in West Bengal and hence the state specific challenges impacted it far severely. Nevertheless, there are expectations slippages will be contained and asset quality will improve from hereon. This change is already reflected in the numbers. EEB (Bandhan's MFI segment) collection efficiency climbed from 86% in Q1FY22 to 96% in Q3FY22. Overall stress in the EEB book declined from INR195bn (36% of the book size) in Q2FY22 to
INR170bn (~30% of the book size) in Q3FY22.

Also the bank is well covered to deal with stress to the tune of Rs. 170 bn in the EEB book with provisions of Rs. 92 billion. There is said to be significant decline in credit costs as well as some provisions are expected to scale down and hence result in profitability.

So, as there is a decline in the GNPA for both retail as well as commercial banking, housing segment is witnessing woes or an uptick in NPA due to problems with the self-employed class.

 

Strong momentum across segments to drive loan growth

The Bank witnessed sharp loan growth before the pandemic nevertheless as collections normalise and asset crisis eases, Bandhan can wholly turn its focus back on growth. In addition, the cash flow of small businesses has improved significantly, aided by strong uptick in economic growth. There has been an increase in loan book by 9.6% during Q3 period and disbursements logged an increase of 32% YoY and 61% QoQ. "We project advances to grow at 20% CAGR over FY21-24. Housing and CB & Retail will be prominent drivers of growth due to management's strategy of bringing down the share of EEB Group Loans in the overall mix to 30% by FY25 from 52% currently.

Granualr deposit franchise providing superior margins:

CASAincreased at a robust CAGR of 39% between Q3FY19 and Q3FY22, and the CASA ratio was up 420bps to 45.6%. This ratio is comparable to that of most large private banks. In comparison, the CASA ratio of most mid-sized banks ranges between 25% and 35%. At 5.2%, Bandhan's cost of funds is still on the higher side compared with that of most banks due to higher rates offered ondeposits. However, a declining trend is clearly noted, as CoF fell 200bps over the last eight quarters. This allowed net interest margin to largely be maintained in the zone of 7-8% despite elevated slippages. On the growth front, we believe Bandhan's plan to add 1,200 branches over the next three years will enable it to rapidly scale up its deposits base.

Return ratios to reattain pre-Covid levels:

"We expect Bandhan Bank's NIM to slightly moderate from here on because cost of funds is bottoming out and the bank's yields will soften due to the shift to secured products such as housing loans. However, the impact of these factors on NIM will likely be offset to a certain degree by the reduction in slippages and, consequently, interest reversals", adds the brokerage.

Further as the asset quality willl see an improvement there will be reduction in credit costs and this will also be helped by the increasing share of secure products in the mix. We expect the bank to report credit cost of around 2.2% in FY24E, down from ~5% in FY21. This will likely result in the bank reporting RoA and RoE of around 3.5% and 25% in FY24E, up from about 2.2% and 13.5% in FY21, respectively.

Valuation and outlook:

At CMP, stocks of Bandhan are trading at 2.0x FY24E ABV. We believe the stock has the potential to trade at 2.5x FY24E P/ABV given our expectation of RoA of 3.5% and RoE of 25% in FY24E. We reiterate our trading "BUY" on Bandhan Bank with a Target price of INR415 per share, which translates into an upside of 24%.

Disclaimer:

The view and the 'Buy' on the stock is as given by the brokerage firm. Readers and investors should not construe the story as an investment advice, please engage in your own due diligence.