Analysts said Bandhan’s weak asset quality and high credit cost have been an outcome of external circumstances, and not because of its underwriting practices.
That said, they feel uncertainty is too high to ignore, especially as the second wave is spreading to eastern India – the bank’s main market. The stock is currently hovering at the lower end of its historical valuation range, they said.
CLSA has reduced the bank’s rating to ‘underperform’ from ‘outperform’ as it feels Bandhan Bank is not well provided for, with provision coverage ratio (PCR) of just 50 per cent. It noted that more than 5 per cent of the loans are in the 30 to 90-day overdue buckets and the bank is materially restructuring its mortgage and MFI books.
“Bandhan Bank has seen material derating over the past 12 months and the stock currently trades near the lower end of the valuation range, but Covid Wave 2 uncertainty remains a high risk and the bank is entering this wave with low provisions,” CLSA said and cut its earnings estimates by 10-33 per cent and price target to Rs 300 from Rs 390 earlier.
Elara Capital said while Bandhan’s liability franchise and pre-provision operating profit are robust, it expects short-term challenges in Assam and West Bengal, the two markets that account for 55 per cent of MFI loans, to put pressure on the stock’s valuations.
“Total outstanding stress loans stood at 15 per cent, with standard stress of 6 per cent, which is uncomfortably high. PCR on GNPLs, including write-offs, stood at 63 per cent against 67 per cent sequentially, while PCR on standard stressed loans stood at a low 8 per cent. PCR on total stressed loan book stood at 41 per cent, which is also low,” Elara said and downgraded the stock to ‘reduce’.
Assam and West Bengal contributed nearly 75 per cent of the writeoffs in the March quarter. Collection efficiency in Assam dipped further to 83 per cent during the quarter from 88 per cent in the December quarter. The collection efficiency in West Bengal, however, improved to 95 per cent during the quarter.
The management said the collection efficiency dipped by a further 3-4 per cent in April.
During the March quarter, the bank wrote off loans worth Rs 1,930 crore compared with Rs 200 crore in the year-ago quarter. It also restructured Rs 617 crore worth of home loans, but decided against restructuring microfinance loans.
“We take cognizance of the possibility that investors may not have the appetite for sharp earnings volatility. This, coupled with near-term asset quality uncertainty on account of resurgence in Covid cases and lower collections could keep the stock under pressure. We downgrade the stock to ‘accumulate’ and revise our target price to Rs 325, based on 2.4 times FY23E ABV,” Nirmal Bang said.
“While the risk of loan waivers is behind us, a fresh set of issues – lower collections, further writeoffs, second Covid wave – are the key reasons for the downgrade,” it said.
Bandhan Bank’s fourth quarter profit fell 80 per cent to Rs 103 crore from Rs 517 crore last year. Interest rate reversal of Rs 538 crore during the quarter on account of recognition of non-performing assets contributed to the drop in net profit.
The lender’s net interest margin, a key profitability parameter, dipped 130 basis points to 6.8 per cent for the quarter under review against 8.1 per cent in the year ago period.
Total provisions almost doubled to Rs 1,594 crore from Rs 827 crore over the same period. The bank said it was also carrying additional provision of Rs 388 crore standard advances of microfinance loans within total provision. The bank’s gross NPA jumped to 6.8 per cent at the end of March compared with 1.5 per cent a year ago. Net NPA ratio stood at 3.5 per cent against 0.6 per cent over the same period.
Edelweiss said even as Bandhan’s long-term evolution of business model and ability to deliver cross-cyclical superior returns enthuse it, near-term red flags around industry, including overleveraging and aggressive competition and uncertainty around asset quality outcomes, compel it to remain cautious.
Kotak said that re-rating for the stock to a higher multiple would need a more normalised business environment, while suggesting that it is less confident on near-term earnings forecasts, as the Covid situation is still developing.
That said, the brokerage expects the second wave to have a lower impact on earnings as much of the weaker borrowers may have been recognised already.
