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JP Morgan
Bandhan Bank (Overweight)
CMP: ₹
Target: ₹330
We upgrade Bandhan Bank to Overweight following sharp underperformance year-to-date (-52 per cent versus Nifty -24 per cent) which we believe has made the valuations for this “specialist” microfinance and mortgage player attractive.
Markets are increasingly concerned about a sharp increase in credit costs for the micro finance segment in F21 given loss in income, high leverage in East India and aggressive lending in the industry. Against this, we highlight Bandhan Bank’s exceptional track record in the MFI business: it has incurred minimal credit losses through successive industry crises over the last 10 years.
Even through the recent stress period in Assam (September-Deccember 2019), the bank had largely normalised its collections by March- 20. Sector-leading operating profit margins are an added offset. The bank went into this lockdown with strong collection efficiency (98.7 per cent), high capital (CET1 23.1 per cent, Assets/Equity 5.8x) and strong liquidity (LCR 161 per cent). As lockdown gradually lifts and collections start normalising over the next six months we believe the business can rebound quickly.
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