Expanding Retail Deposits And Secured Loans Will Strengthen Stability

Key Takeaways

• Emphasizing retail deposit growth and shifting loan book mix could enhance asset quality, lower credit costs, and improve net margins.
  
• Investing in technology and cross-selling initiatives aims to boost operational efficiency and non-interest income, driving overall earnings growth.
  
• Challenges in microfinance, regulatory changes, and cost pressures could negatively impact Bandhan Bank's profitability and growth potential due to elevated credit costs and asset quality concerns.

Catalysts

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

• The bank plans to focus on deposit growth that outpaces advances growth, emphasizing stable granular retail deposits, which could positively impact funding costs and net interest margins.
  
• There is a strategic shift towards increasing the secured loan book mix from 42% to over 55% by FY '27, likely enhancing the asset quality and reducing credit costs, which could improve net margins.
  
• Diversification efforts in liabilities, with a focus on reducing reliance on bulk deposits and increasing retail deposits, are expected to enhance balance sheet resilience and potentially lower cost of funds.
  
• Strategic investments in technology and process modernization, including digital banking platforms and analytical tools, are aimed at boosting customer experience and operational efficiency, possibly improving operating leverage and profitability.
  
• The focus on cross-selling initiatives under the philosophy of One Bandhan and the integration of transaction banking and digital solutions are expected to enhance non-interest income streams, contributing to overall earnings growth.

Bandhan Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bandhan Bank's revenue will grow by 27.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.1% today to 18.7% in 3 years time.
• Analysts expect earnings to reach ₹39.6 billion (and earnings per share of ₹23.13) by about May 2028, up from ₹24.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹51.4 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 10.7x today. This future PE is lower than the current PE for the IN Banks industry at 10.7x.
• 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 14.01%, as per the Simply Wall St company report.

Bandhan Bank Future Earnings Per Share Growth

Risks

• The ongoing challenges in the microfinance sector, including significant stress and liquidity tightness, could impact Bandhan Bank's revenue and profitability as this segment remains a key area of focus but faces elevated credit costs and moderate growth.
  
• The increase in slippages and the elevated Gross NPA (GNPA) and Net NPA (NNPA) ratios in the microfinance segment could negatively influence net margins and overall earnings due to higher provision requirements and asset quality concerns.
  
• The anticipated moderation in net interest margins (NIM) due to a planned increase in the share of the secured loan book might impact profitability, as secured loans generally offer lower yields compared to unsecured microfinance loans.
  
• Elevated operating expenses driven by investments in people, technology, and branch expansion could pressure short-term profitability, affecting operating efficiency and ultimately, net margins.
  
• Regulatory changes affecting risk weight norms and capital adequacy could influence growth potential and profitability, impacting capital allocation and earnings by causing fluctuations in the bank's risk-weighted assets and capital ratios.

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 ₹212.0 billion, earnings will come to ₹39.6 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 ₹165.62, the analyst price target of ₹176.48 is 6.2% 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.