A Kolkata-based lender's valuation is catching attention on Dalal Street — here's why

Jefferies values Bandhan Bank at two times its 12-month forward price to book — or the valuation relative to a business's book value.

The stock has corrected more than 13 percent in the past three months, a period in which the Nifty50 benchmark has risen 6.6 percent.

According to Jefferies, a rebound in earnings momentum can play as a positive catalyst for Bandhan Bank.

Jefferies is banking on an uptick in Bandhan's disbursements and higher interest rates to aid its earnings. The brokerage, however, expects its slippages — or loans turning bad — to increase in the quarter ending September 2022 and and put pressure on its net interest margin (NIM) — a key measure of profitability for lenders.

Bandhan Bank should be able to absorb residual credit costs arising from COVID or restructured books, given its strong liabilities profile, healthy capitalisation and best-in-class operating profit profile, said Jefferies, which expects the lender to deliver a return of equity of 25 percent in the year ending March 2023.

In June, floods in Assam, where Bandhan Bank has the maximum market share, impacted the lender's operations. Many analysts believe the impact of the floods on Bandhan's business should not last long.

Bandhan shares underperformed the market on account of the stress emanating from a series of events such as the pandemic and the Assam floods. However, its operating metrics have improved, with recoveries from its restructured pool expected to trigger earnings and price momentum, according to ICICI Direct.

ICICI Direct has a 'buy' call on the Bandhan stock, valuing it at around 2.2 times its estimated earnings for the year ending March 2024.

For the April-June period, Bandhan reported a more than two-fold jump in net profit to Rs 886.5 crore, missing Street estimates. Analysts in a CNBC-TV18 poll had estimated the financial institution's quarterly net profit at Rs 915.1 crore.

However, its net interest income — or the difference between interest earned and interest paid — increased 18.9 percent to Rs 2,514.4 crore for the three-month period, as against estimates of Rs 2,443 crore.

Edelweiss said the lender's profit moderately exceeded its estimates. "Even as overall stress increased, the decline in slippages and retention of credit cost

guidance lead us to conclude that the floods are unlikely to have a lasting effect on the bank’s performance through the rest of the year," it said.