Bandhan Bank gets a ‘buy’ tag from Goldman on attractive valuation

Goldman Sachs is optimistic about Bandhan Bank’s future prospects, expecting the bank to emerge from its earnings cut cycle soon. The brokerage firm predicts that the bank will experience an increase in return on assets (ROA) and return on equity (ROE) over the fiscal years 2024 and 2025.

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Following a recent decline in the stock price, Goldman Sachs has upgraded its rating on Bandhan Bank from ‘neutral’ to ‘buy’. The brokerage firm sees this correction as an opportunity, as it has made the stock’s valuations more attractive.

The stock has declined nearly 22 percent since October 2022 and fallen 11 percent since the start 2023. “We believe that after this correction and with the stock trading at eight times FY24 EPS, 1.4 times FY24 BVPS and four times FY24 PPOP with improving and normalising ROA/ROEs in FY24, valuation now looks attractive,” Goldman said in its report.

Goldman Sachs is optimistic about Bandhan Bank’s future prospects, expecting the bank to emerge from its earnings cut cycle soon. The brokerage firm predicts that the bank will experience an increase in return on assets (ROA) and return on equity (ROE) over the fiscal years 2024 and 2025.

Goldman Sachs sees several factors driving Bandhan Bank’s compelling valuation post-correction. First, the bank’s microfinance institution (MFI) portfolio has demonstrated an improvement in collection efficiency, reaching 98.5 percent in March 2024. Second, the bank’s provision coverage has increased to around 80% due to the recovery from selling the MFI portfolio twice and recoveries from the guarantee fund. These developments have raised confidence in the MFI-cycle bottoming out at Bandhan Bank.

Third, these factors are leading to an improvement in loan loss provisions (LLP) and operating profits, resulting in a decline in LLP from 98 percent in FY22 to around 30 percent in FY24/FY25. This is expected to drive the return on assets (ROAs) to approximately 3 percent and the return on equity (ROEs) to around 20%+. Goldman Sachs has lowered Bandhan Bank’s target price to Rs269/share from Rs315/share, but still sees an upside of 30 percent driven by its target valuation multiple of 11x 12-month forward earnings.

“While we cut FY23/FY24/FY25 earnings by 14 percent/15 percent/1 percent mainly on lower margins, we see provisioning cost bottoming out in FY23 and therefore expect earnings cuts to also stabilize as loan growth picks up in FY24/FY25 driven by an improved demand in microfinance/SME loans as well as an increase in lending rates on the core portfolio”, Goldman report added.

According to Goldman, Bandhan is poised to reap multiple benefits in the coming years. First, it is expected to benefit from a favorable credit cycle in Microfinance Institutions (MFIs). Additionally, the bank’s efforts towards diversification over the last few years are likely to pay off.

This is evidenced by the increasing proportion of individual loans in the MFI book, which has risen from 10% in the third quarter of FY21 to 32 percent in 3QFY23. Moreover, the non-MFI book’s share has also increased from 33 percent in FY21 to 46 percent in 3QFY23. Furthermore, the bank is expanding into new geographies, such as Telangana in South India.

“While we continue to monitor the bank’s progress on diversification of its loan portfolio, stabilisation of management team as well as clarity on succession planning, we believe the bank is still well positioned to deliver strong ROAs / ROEs of 2.3 percent/19 percent, respectively, over FY23-25, coupled with loan growth of 18 percent CAGR as the MFI / commercial retail businesses recover and current valuations provide a strong buying opportunity,” the Goldman report added.