ICICI Securities maintains its positive outlook on Bandhan Bank with a buy call for Rs 365 Target Price. According to the brokerage's given target price, the stock is likely to give robust gains of up to 52%. Bandhan Bank is a mid-cap private sector commercial bank focused on serving underbanked and underpenetrated markets in India.
Stock Outlook & Returns
The stock on NSE last traded at Rs 240.10 per share, 1.95% up compared to its previous close. It is trading 14.58% away from its 52-week low which it recorded at Rs 209.55 on 22 November 2022. Whereas, its 52-week high level is Rs 349.55, recorded on 17 May 2022. It has a market capitalization of Rs 38,707.19 crore.
Bandhan Bank made its stock market debut on 27 March 2018. The stock in a week moved up by 9.54%, whereas in 1 month it moved up by 3.2%. In 3 months it moved down by 13.06%, and in a year it moved down by 13.9%, respectively. In 3 years it gave 57.77% negative returns. Since its listing on the stock market, it has moved down by 49.65%.
Portfolio & geographical diversification are core strategic priorities; credit cost elevated in Q3
The senior management team of Bandhan Bank (Bandhan) during its analyst day yesterday (1st Dec'22) articulated its strategy on portfolio diversification, geographical expansion and future growth along with delinquency and provisioning assessment for H2FY23. Most importantly, it has set expectations of another Rs15bn in credit cost for H2FY23 and normalisation thereafter. Overall, the bank is looking at 20-25% asset growth, steady-state credit cost of 180bps, 'opex to assets' at ~3% and RoAs in the 2.8-3.2% range.
Key takeaways include
- Stress pool (31-90dpd + restructured accounts + NPA) is expectd to rise from Rs95bn in Q2FY23 to Rs102bn in Q3FY23 and moderate to Rs97bn in Q4FY23.
- Provisioning is expected to inch up to Rs74bn in Q3FY23 and Rs77bn in Q4FY23 - from Rs53bn in Q2FY23. This excludes the benefit of Rs9.3bn from CGFMU recovery anticipated in Q3FY23. This suggests net incremental provisioning requirement of Rs12bn in Q3FY23 (~500ps annualised credit cost) and Rs3bn in Q4FY23 (~125bps annualised credit cost).
- Bank's strategic priorities include portfolio diversification, geographical diversification and focus on granular deposits.
- Proportion of EEB group loans is already down to 40% as of Q2FY23 (vs 59% in FY21 and 61% in FY20) and the bank targets to bring it further down to 26% by FY25. Bank is looking to increase the secured loans mix in overall portfolio to 46% by FY25 - from 38% in H1FY23 and 35% in FY20.
- Housing finance share will inch up from 26% in FY20 and 27% in H1FY23 to 30% by FY25. In the mortgage segment, the bank will expand its presence from higher end of the affordable housing segment to prime housing as well, through dedicated channels for sourcing prime mortgages. It will relaunch construction finance in identified markets and expand the range of LAP products. It will also expand its footprint in under-penetrated geographies.
- Bank targets to scale up its retail assets from 2.2% in H1FY23 to 6% by FY25. It will aggressively ramp-up its gold loan portfolio and has recently launched CV/CE and used car financing.
- Bank is engaging with customers via digital marketing, offline channels and alliances. Granular retail deposit growth will be led by footprint expansion, customer acquisition ramp-up, 'phygital' delivery model, ecosystem partnerships and insight-driven operating models (IDOM) leading through data/analytics.
Buy for a target price of Rs 365/share
Incremental growth drivers would be: individual lending, mortgages, retail assets and commercial banking. Franchise, post absorbing the interim EEB stress pool, has potential to deliver >20% RoE. Maintain BUY with an unchanged target price of Rs365, assigning 2.25x FY24E book.
Key risks: i) higher than anticipated stress and credit cost; ii) pressure on fee income.
The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.