Bandhan Bank shares fall over 5% as brokerages raise concerns over credit cost

The share price of Bandhan Bank declined over 5 percent in early trade on Friday after certain brokerages cut FY21 earnings estimates for the bank due to elevated credit cost seen ahead.

On Thursday, the bank reported a 13.4 percent fall in Q3FY21 net profit to Rs 633 crore from Rs 731 crore for the year-ago period. Its core net interest income grew 34 percent to Rs 1,541 crore on the back of a widening in net interest margin to 8.3 percent from 7.9 percent and 22.6 percent growth in the loan book.

The total provisions of Rs 1,068 crore (which were Rs 294 crore in the year-ago period) included Rs 1,000 crore regarding the ones related to COVID-19. Its chief financial officer Sunil Samdani said the overall credit costs due to COVID-19 will come at 5 percent of the advances as against the earlier estimate of 3.5 percent but added that part of the money was already set aside in March 2020 quarter.

The Gross NPAs declined in Q3FY21 quarter to 1.1 percent from 1.18 percent, QoQ and net NPAs fell to 0.26 percent from 0.36 percent, QoQ. However, if it were to include loans overdue which did not get recognised due to the Supreme Court standstill and on a proforma basis, the same number would have been at 7.12 percent.

Bandhan Bank Q3 profit slips 14%; flags concerns over Assam law on MFIs

Brokerages have raised concerns over the bank’s higher than expected credit costs and uncertainties lying ahead over the political promises of microfinance loan waivers in Assam and West Bengal.

“Bandhan Bank’s 3QFY21 net profit of Rs 6.4 billion missed our estimate by 20 percent primarily due to a higher-than-expected credit cost. Bandhan’s collections plateaued in November 2020 and recent political events in Assam have led to a more than 10percent drop in collections in Assam in January 2021,” CLSA said.

Bandhan Bank’s microfinance gross loan book was up 32 percent YoY in Q3FY21 supporting total loan growth of 23 percent, YoY. However, political promises of microfinance loan waivers in Assam (14% of MFI book) and the upcoming elections in West Bengal (50% of MFI’s book) are headwinds for the business, it said.

The bank’s collections in Assam dipped by more than 10 percent in January 2021 from 88 percent to 78 percent and even in West Bengal collections dipped by 1 percent to 89 percent.

CLSA trimmed its FY21 earnings by 15 percent to account for higher credit costs. The brokerage downgraded its rating from Buy to Outperform and reduced its target price to Rs 390 per share from Rs 430 earlier.

Near-term uncertainty will weigh on above-average profitability, it said. CLSA believes that Bandhan’s PPOP, at 9 percent of loans, is highest among banks and that does provide a cushion to absorb higher credit costs but near-term uncertainty will weigh on above-average profitability.

ICICI Direct believes overall long-term prospects and the structural story remains intact for Bandhan Bank considering immense opportunities in the MFI segment, however, near-term uncertainties are likely to weigh in and could remain hangover on the stock for some time.

“Asset quality performance and developments in key states like Assam and West Bengal would call for a cautious approach for next quarter. We thus downgrade our rating from Buy to Hold with a revised target price of Rs 370 (from Rs 460 earlier) by valuing the bank at 2.7xFY23E ABV,” ICICI Direct said.

Goldman Sachs maintained a Buy call with a target price of Rs 484 per share and revised earnings estimates by -19%/-4%/+1% in FY21/22/23.

The brokerage believes that the bank will still deliver an RoA of 2.8% and RoE of 16.5% in FY21. It expects RoA and RoE to expand sharply in FY22 to 4.3% & 25.5%.

However, Goldman Sachs is of the view that the near-term narrative around loan waiver could weigh on stock performance.

The shares of Bandhan Bank declined as much as 5.80 percent to Rs 321.25 apiece on the BSE. At 10:30 am, the shares were trading 4.53 percent lower at Rs 325.60 as compared to a 0.21 percent fall in the benchmark Sensex.