Bandhan Bank Q3 results muted: What should investors do?

In Q3FY23, Bandhan Bank posted a net profit of ₹290.6 crore down by a whopping 66% YoY, while net interest income (NII) fell 2% YoY during the quarter to ₹2,080.4 crore. On the other hand, the bank’s provisions shot up to ₹1,541 crore in Q3FY23 versus ₹806 crore year-on-year. Gross NPA was muted at 7.2% in Q3 of the current fiscal quarter-on-quarter but dropped from 10.8% in Q3FY22.

On Friday, Bandhan Bank shares closed at ₹237.05 apiece broadly flat on BSE. Its market cap is nearly ₹38,185 crore.

What should investors do in Bandhan Bank stock post-Q3?

In its post-Q3 research note, Motilal Oswal on the bank said, “Bandhan Bank (BANDHAN) reported a muted 3QFY23 characterized by sluggish business growth, tepid NII, and elevated provisions. Margin contracted 50bp QoQ to 6.5%, hit by interest income reversals. However, the bank expects the margin to improve as Dec’22 margin was higher at 7.3%.”

On the other hand, Motilal’s note highlighted that advances grew 2% QoQ to ₹921 billion even as the MFI portfolio declined 2%, supported by a healthy 14% QoQ growth in the non-MFI portfolio. Deposit growth was modest with the CASA ratio witnessing a sharp decline.

While the bank’s gross NPA remained stable at 7.2%/1.9%, respectively, with PCR at ~75% in 3QFY23. Slippages moderated to ₹32.65 billion from ₹39.54 billion in 2QFY23. Motilal’s note added, excluding NPA, CE improved to 98% from 95% in Sep’22, while SMA overdue in the MFI book dipped to 8.1% from 13.0% in 2QFY23.

The brokerage continues to remain watchful of asset quality and the high SMA book which it believes can keep credit costs elevated for Bandhan Bank.

Motilal cited that management commentary indicated slippages in 4QFY23 are likely to drop sharply. Post-adjusting for cash recovery of ₹4.14 billion from the sale to ARC, the provisioning numbers would remain in line with guidance. Also, over the medium term, post-achieving the business diversification goal, the bank is expected to maintain NIMs of ~7.5%. Meanwhile, it expects loan growth to sustain at 20-25% over FY24-25 with a focus on improving business and geographical diversification and expects to maintain 25% YoY growth in the housing business.

On valuation, Motilal’s note said, “BANDHAN reported a muted 3QFY23, with interest reversals adversely impacting NIM, while slippages/provisions remained elevated. Loan growth remained modest; however, the same is expected to pick up gradually. The SMA overdue in the EEB and MFI portfolios has declined to 8.1% from 13.0% in 2QFY23. We continue to remain watchful of asset quality and the high SMA book, which can keep credit costs elevated. We thus estimate an RoA/RoE of 2.7%/22.4% in FY25 and maintain Neutral with a TP of ₹270 (premised on 1.8x Sep’24E ABV).”

In December last year, Bandhan Bank sold a stressed loan worth ₹8,897 crores for ₹801 crore to Asset Reconstruction Company (ARC).It is the first such instance for the private lender.

According to ICICI Direct, Balance sheet restructuring is in progress and the performance continues to be volatile due to higher stress in EEB segment. Expected stability at lower return ratios to keep stock performance muted. Thereby, the brokerage has maintained its ‘Hold’ rating on the bank’s stock. It added, “Rolling to FY25E, we value Bandhan Bank at ~1.9x FY25E ABV and revise our target price from ₹300 to ₹265. Steady state performance will be key for a re-rating.

ICICI Direct has also highlighted key triggers for the bank’s future performances. These are:

– Healthy loan growth guidance (~22% + YoY) with higher growth traction in non-MFI book to aid margins and earnings growth

– The management indicated pressure on deposits to ease, going ahead, and focus will be on retail deposits

– Recovery from Assam relief scheme to aid top-line and keep credit cost steady

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.