Bandhan bank – Deposit franchise holding up well, but asset quality remains a key risk


 Bandhan has witnessed minimal disruption as of now in retail/institutional deposits, mainly
due to inflows in one a/c to offset outflows from another. In fact, the bank has recently paid
off high-cost borrowing of Gruh, given the healthy liquidity position.
 Based on past experience and limited disruption in the rural economy as of now, it expects
the normalcy in collections should return in three months after the moratorium. We
conservatively build in higher NPAs (3.3%)/LLP (2.5%) in FY21E, factoring in back-to-back
disruptions (NRC/CAA and now Covid-19).
 The bank has diversified its asset portfolio, with the MFI share now at 61%, which it would
reduce to 40% over years. It plans to reduce the geographic concentration in WB/NE and
contain the ticket size. Promoter stake reduction to 40% remains another overhang.
 Near-term asset quality disruption remains a risk, but we take comfort in the bank’s healthy
liability profile, strong capital, asset diversification strategy (positive in the long-term) and
reasonable valuations (1.4xFY22 ABV). We retain Buy, with a revised TP of Rs262.

Healthy liquidity; asset diversification to accelerate: The bank has a strong retail deposit
base (77%) with minimal disruption, while it also had some outflows in one of the govt a/c post
the state govt’s dictum, which was well offset by inflows in another a/c. As of now, the bank has
stopped fresh disbursement/collection but has not seen MFI customers dipping into their savings
yet, which is a positive indicator. As a long-term strategy, the bank has already diversified asset
portfolio, with the MFI share down to 61% and to fall further to 40% over the years. Within MFI,
the bank is adding customers at a rate of 2x in other geographies vs. WB and aims to achieve
future growth more from customer addition rather than the ticket size.
Asset quality stress remains a key monitorable: The bank has extended the moratorium to
all its existing MFI customers, but it will be optional for other customers (SME/HL). Our
calculations (refer exhibit 5) suggest that on a MFI loan of Rs50k (int @20%, T=12m), the
moratorium would increase EMI by 5% or Rs59 per week, which may not be a huge burden for
the borrowers. Given nearly 70% rural operations and ~50-60% of its customers being engaged
in essential activities, the disruption should be minimal at the customer end during the
moratorium vs. the typical destruction during natural calamities. Based on past experience, it
believes that post cyclones, riots (Darjeeling) and DeMo, the collection normalcy returned in
three months and hopefully, should be the case this time around as well. The risk of political
intervention after the RBI-induced moratorium has also reduced considerably. We build in higher
LLP at 2.5%/lower RoA at 3.3% in FY21 factoring in back-to-back disruptions (NRC/CAA and
long moratorium due to the Covid-19 related lockdown). However, sensitivity analysis suggests
(refer exhibit 6) that higher LLP of 4%/5% could lead to even lower RoA of 2.4/1.8% in FY21E.