Maintain ‘buy’ on Bandhan Bank with TP of Rs 375

Bandhan’s 2Q21 operating performance was in-line with our expectation, with PPOP growth of 25% y/y supported by 20% y/y AUM growth. Collection trends in micro-banking portfolio have considerably improved since the moratorium ended, recovering to 91% in Oct (95% by number of customers) but still lagging other segments (96-98% collection efficiency in mortgage and commercial portfolio). More importantly, recovery trends seems to have moderated in Oct with only 100-200bps improvement in collection efficiency m/m and >7DPD high at 22-23%. That said, Bandhan has prudently created cumulative Covid provisions of INR17.4bn—2.3% of AUM (3.5% of micro-banking book). Additionally, core PPOP/Assets of >6% and CET-1 of 22% provide enough buffers, in our view. We continue to factor in credit cost of 350bps in FY21F (in addition to 100bps prudently provided in 4Q20). Valuations at 2.15x Sep-22F book adequately price in the risks, in our view. We maintain Buy with a TP of INR375/share (2.7x Sep-22 book) with ROEs normalising back to >20% levels in FY22F itself.

Collection efficiency improved to 91% in microbanking and almost pre-COVID levels in commercial banking (98%) and mortgage book (98%). In volume terms, 95% of micro- banking customers have started making payments (~80% full EMI and rest partial EMIs in Oct). That said, m/m improvement seems to be moderating with 89% collection efficiency only recovering to 91% in micro-banking— highlighting the stickiness of the problem.

In value terms, collection efficiency is still lagging in West Bengal at 90% and Assam at 88-89%, while that in Bihar has recovered sharply to 97% (despite elections). We see headwinds in asset quality for Bandhan with significantly higher market share in higher impacted geographies like Assam and WB (elections due in next 12 months). Top-up loans (12-13% of customers and 7-8% of micro-banking portfolio) are not alarming but not comforting either, given an Rs 35k ticket size.

That said, we think Bandhan has prudently provided with Rs 17.4bn of COVID-19 provisions (cumulative), implying 3.5% of micro banking book or 2.3% of overall book. Additionally, core PPOP/assets of >6% does provide a high absorption capacity for any negative surprise on asset quality.