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CMP, Target Price, Potential Upside, Returns & Performance
Tuesday, 21 June 2022, the stock opened at Rs 278.05/share, while the previous close was Rs 274.05. At the time of writing this article, the Current Market Price (CMP) of the stock is Rs 285.05/share. Today, it moved up nearly 4.01% on NSE. The stock has recorded its 52-week low of Rs 229.55/share on December 17, 2021, and the 52-week high of Rs 354.35/share on 28 June 2021, respectively.
The stock has fallen 13.45% in the last 1 year, and 13.54% in the last 1 month. The market volatility severely affected the share price of the stock. Over the last 3 years, it has fallen nearly 48.86%.
Potential Gains – Considering the Target Price of Rs 343/share and the CMP of Rs 285.05/share of the stock, it could gain nearly 20%.
Credit demand to pick up
Credit growth picked up as Bandhan exited FY22 with advances growing at 14/13% YoY/QoQ. Advances growth was primarily driven by the non-EEB (non-MFI) book which grew by 29% YoY, while the EEB book grew by 7% YoY. Thus, the share of group EEB loans declined to 47% in FY22 from 59% in FY21. Moving forward, the bank will continue to de-focus on the group EEB loans and graduate the customers to the individual EEB loans, thereby bringing down their share to 30% by FY25. The bank’s growth outlook remains robust and the management expects credit growth to be ~25% in FY23E. We expect Bandhan to deliver a strong credit growth of 23% CAGR over FY22-24E, largely driven by the housing and commercial banking segment.
Asset Quality improvement underway
While FY22 was challenging in terms of asset quality and a higher restructured book mainly from the EEB segment, Bandhan managed to exit FY22 with a significant improvement in the asset quality with GNPA standing at 6.5% vs. its peak of 10.8% in Q2FY22. While a large part of asset quality improvement was aided by write-offs, the recovery pipeline remains fairly strong with pace of normal recoveries looking up along with additional recoveries from the Assam relief package. Collections in the key states of Assam and West Bengal witnessed improvement, which stood at 93%/97%respectively in Q4FY22 vs. 91/96% QoQ. The collection in the restructured book, too, has been holding up well, given an improvement in the borrower’s cash flows and is expected to continue remaining strong. The COVID-related challenges in terms of asset quality are largely behind and Bandhan is likely to witness an improving trend from FY23 onwards provided there are no unforeseen disruptions.
Return Ratios to improve
Higher slippages impacted NIMs while high stressed asset pool kept credit costs elevated. With on-ground conditions improving, we expect credit costs to moderate and gravitate to near pre-COVID levels. However, Bandhan will continue to build in buffer provisions to strengthen the balance sheet. We expect credit costs to remain in the range of 2.5-3.5% over FY23-24E. Bandhan has recently taken a rate hike in the EEB segment while the housing loans are floating rate and can be repriced. Additionally, the bank has a strong liability franchise with a healthy CASA ratio of 41.6%. Thus, even in an increasing interest rate environment, we expect NIMs to remain stable at ~8.5% over FY23-24E. Improving NIMs and lowering credit costs will be key drivers for RoA/RoE expansion to 3.2/24.5% by FY24E.
Brokerage Comments & Views
The improvement in collection trends especially in the key states of Assam and West Bengal along with a reduction in overall stressed assets is encouraging. The diversification of the portfolio by reducing the share of the group EEB loans will lend higher stability to the overall book. The bank remains well-capitalized to fuel its medium-term growth.
The brokerage said, “We recommend a BUY rating on the stock with a target price of Rs 343/share, implying an upside of 10% from the Current Market Price.”
Company Overview- Bandhan Bank
Bandhan Bank (Bandhan) was incorporated in December 2014 after the in-principle approval from the RBI to function as a universal bank. The banking operations commenced in August 2015, post the transfer of the MFI business from Bandhan Financial Services Ltd to the bank. The bank is focused on serving the underpenetrated and unbanked markets in India and is predominantly present in the Eastern states of West Bengal and Assam.
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