Ambit Capital Slashes Bandhan Bank’s Target Price On Asset Quality Woes

Ambit Capital Pvt. Ltd. slashed its target price for Bandhan Bank Ltd. as the brokerage expects the lender’s asset quality to deteriorate significantly in the ongoing financial year amid the coronavirus pandemic.

That’s because of two reasons, according to the brokerage’s note:

• Microfinance borrowers are most impacted by the Covid-19-forced lockdown given most of them are daily wage earners.
• Lockdowns impact ability to conduct and collect dues from borrowers given almost entire collections being in cash.

Ambit Capital lowered the target price for the bank to Rs 65 apiece from Rs 395, while maintaining a ‘sell’ rating.

“Once the lockdown is over, we expect the political activism to come into play, impacting Bandhan Bank’s ability to collect money from borrowers,” the brokerage said. “Historically, we have seen that it becomes difficult to collect receivables once borrowers have not repaid for a couple of months—Andhra Pradesh crises in 2010 and demonetisation in 2016-17.”

The coronavirus pandemic has forced India into a three-week lockdown, stalling all but essential economic activity. The shock is expected to impact earnings even though the central bank infused record liquidity, cut rates to their lowest since 2004, offered loan moratorium and the government announced a Rs 1.7-lakh-crore stimulus. Also, the microfinance industry suspended collections during the lockdown.

According to Ambit Capital, Bandhan Bank is more exposed in the current environment, given 62 percent of its portfolio is concentrated in east India where leverage among borrowers is highest due to rising ticket sizes over last three years.

Even its corporate loan portfolio, 5 percent of the loan book, is entirely exposed to microfinance institutions/non-bank lenders, which are most exposed in the current environment, the brokerage said. “We expect its credit costs in microfinance/corporate book to rise to 6.7/3.4 percent in financial year 2021 from an estimated 1.7 percent in financial year 2020.”

Bandhan Bank, according to Ambit Capital, will have to significantly change its operational structure to build other asset classes, hence return-on-equity and growth would remain in single digits for the next 4-5 years. A similar impact was seen in Bharat Financial Inclusion Ltd. where it took almost five years for it to come out of the Andhra Pradesh crises, it said.

Also Read: Surviving The Lockdown: What India’s Businesses Urgently Need

“Apart from low return-on-equity/growth, multiples for microfinance sector would also come down given high asset quality risk coming to the fore.”