Given that a significant portion of stressed assets has already been recognised and the collection efficiency has improved to over 98%, our modelling assumes slippages at approximately 3.0% for FY24E and FY25E. This is a notable improvement compared to the gross slippages of around 9.5-10% observed in the past two years. We commend the bank for its proactive strategy of creating contingent provisions based on the anticipated recovery from CGFMU. Despite the anticipated pressure on the cost of deposits (CoD) in the future, our model incorporates a 10 bps y-o-y increase in calculated net interest margins due to the lower slippages.
Overall, we see the bank delivering 20% loan growth, 2.3-2.4% RoA and 19-20% RoE for FY24E-FY25E. Risk returns are favourable with the stock trading at 1.7/1.4x FY24E/ FY25E ABV and 9.5/7.6x FY24E/ FY25E EPS, respectively. Tier 1 is adequate at 19.8% level. We maintain Buy with target price revised to `300 (earlier `350) valuing the stock at 1.8x FY25E ABV. Key risk is higher than expected stress formation impacting profitability and growth.
The disbursements in emerging entrepreneurs business (EEB) segment of Bandhan Bank showed a significant pickup, with a 39% q-o-q increase. This indicates a healthy revival, which is further reflected in an approximately 8% q-o-q growth in assets under management (AUM) after three consecutive quarters of decline on a q-o-q basis. The disbursements in the housing segment, however, were impacted by IT system migration, resulting in a 57% q-o-q decline. As a result, the AUM in the housing segment remained relatively flat on a q-o-q basis. However, it appears that the situation has normalised from March-April onwards. The bank has provided guidance of 20% y-o-y AUM growth for FY24, with housing expected to grow by 22-25% and other businesses contributing to the growth, while the EEB segment is guided at 17-18% y-o-y growth.
Unlike peers, the bank has been more impacted by covid-19 due to geographical concentration and higher ticket size though now clearly stands at almost the end of the covid-19 stress cycle. With majority of stress recognition already done and collection efficiency rising to >98%, we are modelling-in slippages at 3% for FY24E/FY25E vs 9.5-10% gross slippages in the last two years.