Bandhan Bank’s (Bandhan’s) Q4FY21 PAT of Rs 1 bn disappointed due to asset quality pressure (GNPL 6.8%). High overdues (>5% in 30dpd+ of MFI loans) despite large write-offs (>2% of loans) and provision buffer being almost entirely utilised, increases our caution further from that espoused earlier. The red flags around MFI persist and get reinforced by second wave. Additionally: (i) regulatory overhang; (ii) rising restrictions in WB; and (iii) pool performance boost using top-ups/ECLGS, remain concerns. Given added uncertainty and near full depletion of provision buffer, we cut target multiple to 2.2x (2.5x earlier), leading to revised TP of Rs 280 (earlier Rs 310). Maintain Reduce.
Asset quality pressure starts to manifest: Given the warning signs in MFI industry, we did anticipate high stress. This has started to show in Bandhan’s earnings. High slippages (>10%), elevated headline GNPLs, nearly entire provision buffer drawn down (of Rs 27 bn, >3% of AUM) and very large write-offs (of Rs 19 bn, >2% of AUM) reflect the underlying strain.
Franchise continues to strengthen: One aspect wherein Bandhan has been consistently impressive is in scripting a successful liability franchise story–trend continued in Q4FY21 as well. This, we believe, will support Bandhan’s core profitability growth momentum.
Outlook: Even though Bandhan’s long-term evolution of business model and ability to deliver cross-cyclical superior returns enthuse us, near-term red flags around industry (overleveraging, aggressive competition) and uncertainty around asset quality outcomes compel us to maintain ‘REDUCE/SU’.