Emkay Global holds a positive view on Bandhan Bank. The brokerage sees an upside of 59% in the share price of the bank from its current market price of ₹315. The brokerage has set a target price of ₹500 for Badhan Bank in next 12 months. “We believe that the MFI business is inherently prone to disruptions, be it political or natural adverse events. Being well cognizant of these eventualities, the Bandhan Bank has adopted a strategy to diversify geographically in the MFI business and venture into other products, including relatively secured mortgages, gold loans and so on. However, this transition will take time,” says Emkay Global Financial Services.
The brokerage adds that the bank has been building provisioning buffers on the back of its strong operating profitability to absorb asset quality accidents and reduce earnings volatility. Emkay Global has trimmed the earnings estimates for FY21 by 14%, factoring in higher provisioning cost, but raised for FY22/23 as growth accelerates, delivering superior return ratios.
Key risks to the brokerage’s call are higher-than-anticipated NPA formation, management attrition and regulatory intervention for the sector in general.
Here are the key highlights of the report:
-> Despite strong core earnings driven by healthy business momentum, accelerated provisions due to elevated stress in MFI ( ₹10bn) led to a 9% miss on PAT at ₹6.3 bn (est. ₹6.9bn). With more provisions, the cumulative provisioning buffer is strong at ₹27.4 bn (3.4% of overall AUM).
-> Overall proforma GNPA ratio stands high at 7.1%, which adjusted for part payment customers would be around 3.5%. The bank has not done any restructuring yet unlike other banks but may consider doing so by Mar’21 for customers making part-payments.
-> As per management, collection efficiency in Assam was 89% in Jan’21, mainly hit by waiver pronouncements by political parties in the run-up to elections. Based on current assessment, the bank expects a potential 10% loss in the portfolio. Factoring in elevated proforma stress and its stance to take the pain upfront in FY21, the bank raised FY21 LLP guidance to 5% from 3.5-4%.
-> The MFI business is typically prone to asset quality accidents, and thus we like the bank’s asset diversification strategy (product/geography-wise) away from MFI and aggressive provisioning strategy, thanks to its strong operating profitability.