Brokerage firm Phillip Capital has initiated coverage on the stock of Bandhan Bank with a 'buy' call, fixing the target price at ₹330, implying a 41 percent upside in the stock price.
While most banking stocks have clocked stellar gains in the last one year, Bandhan Bank has disappointed investors.
In the last one year, the stock has fallen 8 percent against a 22 percent rise in the banking index and a 5 percent rise in the benchmark Sensex.
Phillip Capital underscored that Bandhan Bank is undergoing a transformation in terms of loans and geographical mix.
The brokerage firm believes the changes will de-risk the bank’s balance sheet from socio-economic shocks and provide greater visibility to its earnings.
"To de-risk its portfolio, the bank plans to increase the proportion of secured businesses such as a mortgage, commercial loans, and other retail loans. The proportion of unsecured businesses is likely to decline to 53 percent by FY25 from 67 percent in FY22. The change in loan mix will have a bearing on sustainable margins and return on asset," Phillip Capital said.
"The focus on secured retail loans and commercial loans would help de-risk the portfolio, enable the bank to increase its leverage position, and help build a sustainable liability franchisee in the form of retail deposits and current account float from the commercial segment," said the brokerage firm.
As the bank invests in people, products, and presence, the brokerage sees the support to profitability through lower credit costs, before these investments start paying off.
"We believe the unsecured book (53 percent of loan book by FY25) will provide a high return ratio to the bank, and at the same time, the secured book will contain the impact of external shocks and help build a decent liability franchise for the bank," said Phillip Capital.
"The change in loan mix will reduce net interest margins (NIMs), and stabilize return on assets (RoA) at a level lower than the bank’s historical average; however, we believe the ability to leverage the balance sheet will keep return on equity at nearly 19 percent, much higher than some of the front-line banks," it added.
Phillip Capital expects a strong bounce-back in RoA to 2.2 percent in FY23E, 2.5 percent in FY24E and 2.5 percent in FY25E from just 0.1 percent in FY22.
According to a MintGenie poll, 27 analysts on average have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.