MFI recovery, credit cost moderation key triggers for Bandhan Bank

Stock has sharply underperformed peers and is available at reasonable levels

At a recent analyst meet, Bandhan Bank outlined a strategic shift to try and reduce its exposure to the high-volatility, micro-finance segment (MFI). The bank is looking to grow its non-MFI vertical consisting of housing, commercial banking and retail assets at a faster pace in order to reduce its exposure to Emerging Entrepreneurs Business (EEB) to 26 per cent of assets by 2024-25 from the current 40 per cent. The recovery for Bandhan has been delayed compared to other microfinance lenders, given a prolonged Covid impact and concentration issues in Assam and West Bengal.

The management indicated that its geographical diversification of its EEB portfolio is also on track, with West Bengal and Assam now contributing to less than 50 per cent of the aggregate EEB book vs 60 per cent in 2019-20. The bank has focussed on Gujarat, Andhra Pradesh and Telangana for opening new banking units. The Bengal and Assam EEB exposure is expected to reduce to 40 per cent of all EEB assets by 2024-25.  It is adding 500 new branches including many new branches in Maharashtra, Uttar Pradesh, Karnataka, Tamil Nadu and Gujarat.

The bank’s credit costs have been elevated on account of higher slippages from the restructured book and floods in Assam. The management expects further slippages with credit costs peaking in Q3, 2022-23 and then moderating towards stable credit costs of 1.8 per cent in 2024-25. In 2022-23 and 2023-24 credit costs of 3.9 per cent and 2.5 per cent respectively are expected.

The management guided that they expect NIMs to be 7.5 per cent which is lower than 8 per cent on the current asset mix. But the drop in credit costs should aid in delivering steady return on assets of 3 per cent (management estimates).

The management estimates the total stress pool in the EEB segment to be around Rs 9,700 crore by Q4, 2023-24 vs Rs 9500 crore in Q2, and coverage on the same is expected to increase to 79 per cent (vs 56 per cent in Sep’22). The total provision gap is about Rs 2,000 crore.

Bandhan has a target for commercial banking, housing, retail assets forming 38 per cent, 30 per cent and 6 per cent respectively of the overall book by FY25 as compared to 31 per cent 27 per cent and 2 per cent respectively at the moment. The bank wants to focus more towards secured lending and secured lending as a ratio of the overall book is expected to reach 46 per cent by 2024-25 vs 38 per cent now.

That bank has a CASA of 41 per cent with retail holding 74 per cent of total deposits. It hopes to push up CASA to 45 per cent and retail holdings to 80 per cent.  The stock has lost ground in the past year – Bandhan has returned -15 per cent during a period when the BankNifty has returned 18 per cent.

At the current price of Rs 240, the valuation is fairly inexpensive if there’s a cyclical recovery in MFI and moderation of credit costs. Despite elevated provisioning needs and the chances of a rocky second half, analysts have mostly buy ratings with price targets ranging between 270, and 325.