KRChoksey Research has issued an "Accumulate" call on Bandhan Bank, with a revised target price of Rs.200, indicating an 8.2% potential upside from its current market price of Rs.185. The firm acknowledges the bank's robust loan growth and core business momentum but expresses caution regarding elevated slippages, particularly within the Emerging Entrepreneur Business (EEB) segment. KRChoksey anticipates continued growth in secured lending, driven by the bank’s geographic diversification efforts and an enhanced focus on asset quality.

Key Investment Summary

Target Price: Rs.200
Current Market Price (CMP): Rs.185
Upside Potential: 8.2%
Rating: Accumulate
Sector: Banking

Strong Loan Growth with a Shift to Secured Assets

Loan and Advances Expansion: Bandhan Bank’s loans and advances rose by 23.6% YoY to Rs. 1,260,557 million as of September 2024, supported by a 21.4% increase in secured loans. The loan book now comprises 47% secured assets, up from 42% in March 2024.
Growth in Customer Base: The bank added 0.7 million customers, expanding its total customer base to 35.1 million.

Asset Quality Pressures and Elevated Slippages

Gross and Net Non-Performing Assets (NPA): As of September 2024, the bank's GNPA stood at 4.68%, a slight increase from 4.23% in the previous quarter but improved YoY. The NNPA settled at 1.29%.
Slippages: Slippages rose to Rs. 11.15 billion, primarily driven by stress in the EEB segment, with slippages in this segment alone increasing to Rs. 7.5 billion.

Revenue Growth and Profitability Trends

Net Interest Income (NII): Bandhan Bank reported a YoY growth of 20.7% in NII, totaling Rs. 29,483 million for Q2FY25. The bank’s yields on advances improved by 40 basis points YoY, with NIM reaching 7.4%.
Pre-Provision Operating Profit (PPOP): Bandhan Bank's PPOP for Q2FY25 rose by 17.2% YoY to Rs. 18,551 million.
Profit After Tax (PAT): The bank’s net profit surged by 30% YoY to Rs. 9,374 million due to reduced provisioning.

Liabilities and CASA Ratio

Deposit Growth: Deposits grew by 27.2% YoY to Rs. 1,425 billion as of September 2024. However, the CASA ratio experienced a decline to 33.2%, down from 38.5% YoY.
CASA Strategy: Bandhan Bank continues to prioritize strengthening its CASA deposits, focusing on savings account relationships.

Operational Efficiency and Cost Management

Cost-to-Income Ratio: Operating expenses increased by 20.5% YoY, driven by investments in technology and infrastructure. This resulted in a cost-to-income ratio of 47.6% for Q2FY25, up by 258 basis points from the previous quarter.
Future Focus: The bank aims to keep its OpEx ratio aligned with FY24 levels, attributing higher costs to investments in people, technology, and new initiatives.

Valuation and Revised Price Target

KRChoksey has revised Bandhan Bank's target price from Rs.217 to Rs.200, based on a price-to-adjusted book value (P/ABV) multiple of 1.2x. This revised target reflects the challenges in the microfinance sector and the cautious outlook on Bandhan’s EEB portfolio.

Conclusion: Accumulate for Steady Growth in Core Lending

In conclusion, KRChoksey maintains an "Accumulate" rating on Bandhan Bank, expecting steady returns in core segments like secured lending. Despite short-term challenges in asset quality, particularly in the EEB segment, the bank’s strategy of geographic diversification and its expansion in secured assets position it for sustainable growth. With an anticipated upside of 8.2%, Bandhan Bank offers an attractive medium-term investment option.