Asset quality deteriorates; CE remains key monitorable: Bandhan Bank reported 1QFY22 PAT of ₹3.7b, above our estimate — supported by margin improvement (170bp QoQ) and lower provisions v/s MOFSLe — even as MFI loans / total AUM declined 9%/~8% QoQ. On the liability front, the CASA ratio came in stable at ~43%, while the proportion of retail deposits improved to ~83% (v/s 79% in FY21). Slippage was elevated at ₹16.8b (annualised slippage ratio of ~9%), with MFI slippage at ~₹10.4b.
Therefore, the GNPA ratio increased 137bp QoQ to ~8.2%. Provisions were elevated, with annualised credit cost at 7.2% of loans. Thus, the provision coverage ratio (PCR) improved to ~62% of loans (v/s 50% in FY21). The restructured book increased sharply to ~₹53b (6.6% of total AUM). SMA loans surged to 21%, while a large portion of the SMA overdue in Assam was eligible for a relief package. As a result, LGDs would remain controlled.
Collection efficiency (excluding NPAs) in the MFI portfolio stood at 86% (~85% for West Bengal) and remains a key monitorable in the near term. Overall, asset quality remains uncertain, and we estimate credit costs to remain elevated at 5.5% of loans for FY22 (similar to FY21 levels). Maintain Neutral.
Restructured portfolio grows to 6.6% of AUM; PCR improves to ~62%: Bandhan Bank reported PAT of ₹3.7b (v/s estimate of INR1.8b) despite elevated provisions of ₹13.7b (annualised credit cost at 7.2% of loans). NII growth came in at 17% YoY (4% above estimate) despite sequential decline in AUM growth (~8% QoQ), supported by 170bp QoQ expansion in margins to 8.5%.
Other income grew 38% YoY, supported by a benign base. PPOP, thus, grew ~18% YoY to ₹18.7b (5% beat). AUM declined ~8% QoQ (up 8% YoY) on ~9% QoQ decline in the MFI portfolio and 4% QoQ decline in the housing portfolio. The share of the MFI portfolio stood at ~66% of total AUM (v/s ~67% in FY21).
On the asset quality front, slippage stood elevated at ₹16.8b (annualised slippage ratio of ~9%). Therefore, the GNPA ratio increased 137bp QoQ to ~8.2%, while the NNPA ratio declined 22bp QoQ to 3.29%. Provision coverage improved to 61.8% (v/s 50.3% in FY21).
Highlights from management commentary: Slippage from the MFI portfolio was ~₹10.4b, with recoveries and upgrades of ₹5.1b. At the portfolio level, total slippage stood at ₹16.8b, while recoveries and upgrades at ~₹10b. The bank has availed CGFMU (a guarantee from the central govt) on the total portfolio of ₹143b. Nil disbursements were made in Assam during the quarter. Also, there were nil disbursements under the credit guarantee scheme.
Valuation and view: Bandhan Bank reported higher-than-estimated PAT, supported by margin expansion. This was despite elevated slippages/provisions due to (a) the second Covid wave (which severely impacted the MFI sector) and (b) the disturbance in credit culture due to loan waivers. Restructuring/SMA overdue in the MFI book increased sharply. Provision coverage increased to ~62%, which gives us some comfort.
Collection efficiency in the MFI portfolio stood at 86%, with 85% for West Bengal – closer to the rest of India. Overall, asset quality remains uncertain as the pool of restructured/SMA overdue remains high. Thus, we estimate credit cost to remain elevated at 5.5% of loans for FY22 (similar to FY21 levels). Maintain Neutral, with revised TP of ₹330 (2.4x FY23 ABV).