Bandhan Bank Dips 13% In 2 Days; Analysts See Upto 59% Upside

On Friday, shares of Bandhan Bank closed 7.5% down at Rs 314.95, falling 13% in the past two trading days, after the lender reported a weak set of numbers for the December-ended quarter.

The private sector lender reported a 13.5% fall in net profit at Rs 633 crore from the same period a year ago.

The bank saw a sharp jump in its provisions and deterioration in asset quality that shocked investors but analysts remain bullish on the stock.

Operating performance remains strong, led by higher net interest income (NII) as margin improved 30 basis points (bps) sequentially, while assets under management (AUMs) grew at 23% year-on-year. NII for the quarter grew by 34.5% to Rs 2,072 crore as against Rs 1,540 crore in the corresponding quarter of the previous year.

Increased provisions and deterioration in asset quality

In the December-ended quarter, the bank took accelerated additional provision on standard assets amounting to Rs 1,000 crore on account of COVID-19.

Bandhan Bank reported a sharp deterioration in asset quality trends with pro-forma gross non-performing assets (GNPA) ratio increasing to 7.1% while collection efficiency in the microfinance institution (MFI) portfolio in its core state of Assam has witnessed a sharp decline, Motilal Oswal Securities said in results update.

"The bank has made higher COVID-related provisions of Rs 1,000 crore during Q3FY21, pre-dominantly towards rising stress in Assam, thus taking additional provisions to 3.6% of loans to manage higher delinquencies in coming quarters," the brokerage added.

Operating performance remains strong and continues to demonstrate strong deposit performance, led by retail deposits.

The brokerage further said while maintaining a 'neutral' rating on the stock on the back of rising asset quality concerns.

Emkay Global bullish on the stock

Emkay Global sees an upside of 59% in the share price of Bandhan Bank from its current market price of Rs 315. The brokerage has set a target price of Rs 500 for the bank in the next 12 months.

"We believe that the MFI business is inherently prone to disruptions, be it political or natural adverse events. Being well cognizant of these eventualities, the Bandhan Bank has adopted a strategy to diversify geographically in the MFI business and venture into other products, including relatively secured mortgages, gold loans and so on. However, this transition will take time," says Emkay Global Financial Services.

The brokerage adds that the bank has been building provisioning buffers on the back of its strong operating profitability to absorb asset quality accidents and reduce earnings volatility.

Fresh blow, but not unexpected

Kotak Institutional Equities said Bandhan Bank's performance on the asset quality front was a "fresh blow, but not unexpected".

"The long-term growth opportunity, especially outside of microfinance, remains intact, and the bank's strong liability profile and superior cost structure give it an advantage over its peers," the brokerage firm said in a note.

The brokerage has cut its price target on the stock by 6%, but retained its 'add' rating as it remains positive on the lender's long-term prospects.

Meanwhile, CLSA Asia-Pacific Markets said that Bandhan Bank's pre-provision operating profit is the highest among banks, at 9% of the loan book, and will provide a cushion against surging bad loans, but it expects it to struggle on the earnings front in the near-term.

The brokerage firm downgraded the stock to 'outperform' from 'buy', and cut its price target by a steep 12% to Rs 390.

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