Loan growth, higher return ratio hopes positive for Bandhan Bank

A big earnings beat drove the share price of Bandhan Bank up sharply. The bank reported a net profit of Rs 1,060 crore in Q1FY25, up 47 per cent year-on-year (Y-o-Y) due to controlled operating expenditure and provisions. The net Interest income (NII) grew 20.7 per cent Y-o-Y to Rs 3,010 crore which was in line with consensus. The net interest margin or NIM was stable Q-o-Q at 7.6 per cent.

The operating expenses grew 21 per cent Y-o-Y but reduced 8 per cent Q-o-Q to Rs 1,590 crore, which was lower than expectations. The cost to income ratio moderated 331 basis points Q-o-Q to 45.1 per cent in Q1FY25. Advances grew at 23.8 per cent Y-o-Y (0.4 per cent Q-o-Q), but deposit growth was modest at 22.8 per cent Y-o-Y, down 1.5 per cent Q-o-Q. The CASA ratio, moderated 372 basis points Q-o-Q to 33.4 per cent during the quarter. The non-micro credit book rose 22.8 per cent Y-o-Y (up 2 per cent Q-o-Q). The bank guided for 18-20 per cent credit growth for the next 2-3 years.

The gross non-performing assets (GNPA) and net NPA ratios deteriorated 39 basis points and 4 basis points Q-o-Q to 4.2 per cent and 1.15 per cent, respectively. However, slippages improved to Rs 890 crore vs Rs 1,020 crore in Q4FY24. The SMA (special mention accounts) book increased 30 basis points Q-o-Q to 2.3 per cent. The provisioning coverage (PCR) increased to 73.7 per cent. The CRAR (Capital-to-Risk Adjust Assets Ratio) declined sharply due to the impact of an increase in risk weights in EEB (emerging entrepreneurs business) book from 75 per cent to 125 per cent. The CAR (Capital Adequacy Ratio) stood at 15.7 per cent (including profits, it declined 260 basis points Q-o-Q).

Other income grew 37 per cent Y-o-Y to Rs 530 crore, resulting in 22.8 per cent Y-o-Y growth in total revenue. The pre-provision operating profit or PPOP rose 24.2 per cent Y-o-Y and 5.6 per cent Q-o-Q to Rs 1,940 crore which beat consensus, as opex dropped 8 per cent Q-o-Q to Rs 1,590 crore.

The bank did not add branches in Q1FY25 and expects the pace of branch additions to be moderate.

The yield on advances (YoA) stood at 16 per cent. The shift towards a higher mix of secured assets will reduce YoA, but this will be offset by lower slippages. The YoA is expected to be 15-16 per cent going forward. The bank guides for Rs 60-70 crore of ARC recoveries in every quarter.

Analysts are upgrading earnings estimates for FY25 and FY26 by double-digits and expect return on assets and return on equity of 2.2 per cent and 18.9 per cent, respectively in a two-year timeframe. The FY24–26 annual loan growth could be 15 per cent with deposits outpacing loan growth, according to guidance.

The PPOP assets are broadly unchanged at 4 per cent for FY24-26E. Despite the decline in slippages, the FY25-FY26 credit cost estimates at 2.3 per cent and 2 per cent are conservative and assume PCR rising to 75-80 per cent.