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    Why Nomura downgraded this lender despite it performing better than larger peers

    Why Nomura downgraded this lender despite it performing better than larger peers

    Why Nomura downgraded this lender despite it performing better than larger peers
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    By Pranati Deva   IST (Published)

    The share price of Bandhan Bank has surged over 27 percent in the last 1 month, making it the top performer in the Nifty50 index. In comparison, the other largecap banks like ICICI Bank, HDFC Bank, Axis Bank and Kotak Bank gained below 10 percent in this period.
    Despite the better performance, global brokerage house Nomura continues to prefer the frontline lenders like ICICI Bank, Axis Bank and HDFC Bank and believes they are better placed.
    The brokerage has downgraded Bandhan Bank to 'reduce' with a target price of Rs 325, indicating a 7 percent downside for the stock.
    As per Nomura, the bank has reported better than expected performance in the June quarter. It also has built COVID provisions of over 2 percent of AUM which strengthens its balance sheet and has witnessed improvement in collection trends to over 70 percent, which is much better than peers.
    However, the brokerage remains concerned about the sustainability of the collection trends. It added that the valuations leave little room for comfort.
    It added that risk remains elevated for the MFI business (64 percent of AUM), and the mortgage business has also not seen any meaningful improvement in moratorium.
    "We take less comfort in extrapolating a sharp improvement in collection trends, and with over 30 percent MFI customers still not paying a single EMI, concerns about the sustainability of collection trends," the report stated.
    Though the brokerage sees certain positives for the stocks, it noted that the valuations seem to have priced in those.
    As per the brokerage, the positives include:
    1) Strong liability positioning with continued deposit traction leading to best-in-class CASA ratio seen in any similar vintage banks.
    2) Bandhan is likely to benefit from the reduced competitive intensity (as a result of the COVID-19 crisis).
    3) Strong PPOP/asset of over 6 percent annually and 23 percent tier-1 should help Bandhan absorb elevated credit costs.
    4) It expects diversification through the Gruh merger to aid both better growth trajectory and lower credit cost.
    In the June quarter, the lender posted a nearly 32 percent decline in net profit to Rs 549.82 crore for April-June quarter of the current fiscal, mainly due to additional provisioning in the wake of COVID-19.
    The Kolkata-headquartered lender had posted a net profit of Rs 803.62 crore in the corresponding quarter of the previous fiscal.
    Sequentially, the profit in June quarter FY21 was higher, compared to Rs 517.28 crore in March 2020 quarter.
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