Digital Transformation And Secured Loan Growth Will Boost Bank's Future Stability

Key Takeaways

• Integrating digital tools and automation to enhance efficiency and customer experience aims to boost revenue growth by reducing costs and improving retention.
  
• Emphasis on secured loans and granular retail deposits seeks to reduce risk and ensure long-term earnings stability, supporting revenue and margins.
  
• Bandhan Bank faces profitability challenges due to microfinance risks, regional concentration, elevated credit costs, and higher funding costs impacting net interest income.

Catalysts

Engages in the provision of banking and financial services for personal and business customers in India.

• The formation of a dedicated transformation management team, tasked with integrating digital tools and automation, aims to enhance operational efficiency and customer experience, potentially affecting revenue growth positively by reducing costs and improving customer retention.
  
• Establishing a digital and transaction excellence unit under a senior executive is expected to augment granular deposits and fee-based income, which can lead to increased revenue and improved net margins due to enhanced payment solutions and digital offerings.
  
• The focus on building a strong MSME book and increasing the secured loan mix to over 55% by FY '27 is likely to reduce risk and stabilize margins, potentially leading to steady revenue growth and improved asset quality.
  
• Initiatives to enhance customer experience through seamless interactions and digital expansion could boost customer loyalty and attract new clients, supporting revenue growth through an expanded customer base.
  
• Strategic focus on liability growth exceeding advances growth, with a reduction in bulk deposits and an emphasis on stable, granular retail deposits, aims to ensure long-term sustainability, positively impacting net interest margin and earnings stability.

Bandhan Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bandhan Bank's revenue will grow by 27.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.1% today to 18.6% in 3 years time.
• Analysts expect earnings to reach ₹39.7 billion (and earnings per share of ₹23.13) by about April 2028, up from ₹24.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹51.6 billion in earnings, and the most bearish expecting ₹29.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, down from 11.1x today. This future PE is lower than the current PE for the IN Banks industry at 10.9x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.0%, as per the Simply Wall St company report.

Bandhan Bank Future Earnings Per Share Growth

Risks

• The microfinance sector, a significant part of Bandhan Bank's portfolio, is facing headwinds and elevated risks in portfolio quality, which could increase the bank's non-performing assets and credit costs, impacting net margins and earnings.
  
• Bandhan Bank's efforts to grow its secured asset book may moderate net interest margins (NIM), as secured loans generally have lower yields compared to unsecured loans, potentially impacting future earnings and profitability.
  
• The bank's geographic concentration, particularly in East and Northeast regions, though improving, still poses a risk from regional economic downturns or policy changes, which could affect revenue growth.
  
• Elevated credit costs at 4.1% for the current quarter, driven by higher slippages in the EEB book, could exert pressure on the bank's overall profitability if the trend continues without significant improvement.
  
• The competitive landscape for deposits is resulting in higher funding costs for Bandhan Bank, which could pressure net interest income and margins if not offset by revenue growth in other areas.

Valuation

• The analysts have a consensus price target of ₹176.48 for Bandhan Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹225.0, and the most bearish reporting a price target of just ₹130.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹214.0 billion, earnings will come to ₹39.7 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 14.0%.
• Given the current share price of ₹170.59, the analyst price target of ₹176.48 is 3.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.