Bandhan Bank shares climb over 9% in 5 days; experts suggest buying with target price at ₹365

On Friday, Bandhan Bank shares rose by 1.91% to end at ₹240.10 apiece on BSE. Overall, the shares gained by more than 3% on Dalal Street. The bank’s market cap is around ₹38,675.92 crore.

Compared to its 52-week low of ₹209.45 apiece that was recorded last month, Bandhan Bank shares have skyrocketed by nearly 15% on D-Street.

JM Financial cited that Bandhan Bank’s management in the latest analysts meeting highlighted their strategic priorities going forward. These are — a) portfolio diversification, b) geographical diversification, c) focus on granular deposits, and d) revamping its IT and digital capabilities. Also, the bank plans to grow its non-MFI vertical (Housing, Commercial Banking, and Retail Assets) at a faster pace to reduce its share of EEB (Group Loans) to 26% by FY25E (vs 40% in Sep’22).

Further, the bank’s senior management indicated that geographical diversification of its EEB portfolio is on track, with West Bengal and Assam contributing <50% of the EEB book as of 1HFY23 (vs 60% in FY20) and it is expected to further come down to 40% by FY25E. Bandhan’s credit costs have been elevated on account of higher slippages from the restructured book and floods in Assam, the management expects credit costs to peak in 3Q23 and then start moderating towards steady-state credit costs of 1.8%.

In its note dated December 2nd, JM Financial further said, “We build in credit costs of 3.9%/2.5% in FY23E/24E. Management highlighted that post the asset mix change they expect NIMs to be c.7.5% (vs 8% on the earlier asset mix), however, lower credit costs on account of a higher share of secured lending (46% of the total book by FY25E vs. 38% as of Sep 22) should aid the bank in delivering a steady-state RoA of 3% (as per management).”

Also, Bandhan’s recovery has been delayed versus other microfinance lenders given the prolonged Covid impact and concentration. JM Financial’s note added, “This has led to significant stock price underperformance over the 6M/12M basis (21.5%/18.5% for Banknifty vs -28.4%/-15.5% for Bandhan).”

“We see a) delivery on current guidance (peak stress in 3Q and moderation of credit costs thereafter), b) efforts to diversify, and c) building up of provision buffers should result in confidence coming back in the bank’s medium-term return prospects. In this context, current valuations (1.5x FY24E BVPS) offer a favourable risk-reward. We maintain BUY with revised TP of ₹325,” JM Financial’s note added.

Meanwhile, ICICI Securities in its note added, “Incremental growth drivers would be: individual lending, mortgages, retail assets, and commercial banking. Franchise, post absorbing the interim EEB stress pool, has the potential to deliver >20% RoE. Maintain BUY with an unchanged target price of Rs365, assigning 2.25x FY24E book. Key risks: i) higher than anticipated stress and credit cost; ii) pressure on fee income.”

In the second quarter of FY23, the bank posted a net profit of ₹209.3 crore compared to a loss of ₹3,008.6 crore in Q2FY22. However, Q2 PAT dipped by 76.4% from a profit of ₹886.5 crore recorded in the June 2022 quarter. Net interest income (NII) came in at ₹2,193 crore in Q2FY23 which rose by 13.3% from ₹1,935.4 crore in Q2FY22, but lower by 12.8% from ₹2,514.4 crore in Q1FY23.

During Q2FY23, the bank’s total Advances (on-book + off-book + TLTRO + PTC) grew by 17.4% to ₹95,834.9 crore against ₹81,661.2 crore in Q2FY22. While total deposits jumped by 21.3% to ₹99,365.8 crore in Q2FY23 versus ₹81,898.3 crore in Q2FY22.

As of September 30, 2022, the bank’s gross NPA was at Rs6,853.9 crore (7.2%) against ₹6,967.5 crore (7.3%) as of June 30, 2022, and against ₹8,763.6 crore (10.8%) as of September 30, 2021.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.