Ambit Capital slashes price target for Bandhan Bank by 84%, maintains sell

The cut in the target price is driven by expectations of losses in the current financial year and a single digit return on equity (RoE) over the next 4-5 years, the brokerage said, adding that multiples for microfinance sector will also come down given the high asset quality risk coming to the fore.

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Shares of Bandhan Bank closed 0.7% lower at ₹192.30 apiece on the BSE on Thursday. Since 1 January, the stock has declined 60%.

“We expect a deterioration in the asset quality in FY21. Microfinance borrowers are mostly impacted by the lockdown given most of them are daily wage earners. Lockdown has impacted the ability to collect dues from the borrowers given almost entire collection is in cash," Ambit Capital said in a report.

Also, Bandhan Bank’s corporate loan portfolio which amounts to 5% of its loan book is entirely exposed to MFIs and non-banking finance companies (NBFCs) which are at high risk in the current environment. The brokerage expects 5-15% slippage in the lender’s corporate loan portfolio which may increase the credit cost in FY21 and FY22. High defaults in microfinance will lead to significant slowdown in loan growth and compression of net interest margins.

“Bandhan is more exposed in the current environment as 62% of its portfolio is concentrated in East India where leverage among borrowers is highest due to rising ticket sizes over the past three years," Ambit Capital added.