Emkay Global Financial Services has placed a target price of Rs 500 on the stock of Bandhan Bank, implying a potential upside of nearly 50 per cent from current levels.
"Bandhan Bank has reported better-than-expected AUM growth of 21% yoy/8% qoq to Rs802bn (provisional) on a high base, primarily driven by better disbursement trends in MFI, small business loans and mortgages, in our view. Q4 is seasonally a strong quarter for lenders with a sizeable MFI portfolio. Creditaccess (18% yoy/14% qoq), Ujjivan (7% yoy/11% qoq) and Satin Creditcare (1% yoy/5% qoq) too have reported healthy growth, as per their business updates," Emkay Global Financial Services has stated.
Deposits growth remained strong at 37% yoy/10% qoq to Rs780bn (a phenomenon seen across banks), given the bank's strong liability franchise. CASA ratio improved by 50bps qoq/660bps yoy to 43.4%. Deposits are now 90% of AUM vs. 79% in Q4FY20, leading to lower CoF and thus being structurally long-term positive for NIMs.
"Amid concerns around the asset quality due to waiver announcements in Assam and elections in Assam/WB, the bank has reported slightly better overall collections at ~96% (EEB-Microfinance at 95% vs. 90% in Jan'20 ? after slip down in Assam ? and 92% in Dec'20 in value terms). We seek more clarity on collection efficiency specifically in Assam/WB. Collection efficiency in the non-EEB portfolio was robust at 98%," Emkay Global Financial Services has stated.
The bank has strategically created a strong provisioning buffer to absorb any asset quality shocks. The cumulative contingent buffer stands at Rs27.4bn, 3.1% of AUM. We expect the bank to largely absorb the Assam related asset quality pain upfront in Q4 through the provisioning buffer (Collection efficiency in Assam in Jan'21 was ~89%). With the second wave of Covid-19 surging, we expect the bank to make some additional provisions, which may result in moderate profitability in Q4.
"We like Bandhan's strategy to diversify the asset portfolio away from MFI (product as well as geography-wise) in the wake of rising adverse asset quality events while creating strong provisioning/capital buffers. After the recent correction, the stock is trading at reasonable valuations of 2x FY23 ABV. Currently, we have a Buy rating on the stock," the broking firm has stated.