Bandhan Bank can take heart from election manifestos

Bandhan (rated ‘buy’) can benefit.

BJP’s election manifesto for Assam doesn’t propose loan waivers, but may offer financial support to stressed borrowers & tighten collection norms. This is a positive surprise as its rival, Congress, offered waivers to micro-borrowers that raised concerns. We note that none of the parties are offering MFI waivers in West Bengal (30% of loans) & in Assam 10% loan-collection rate can improve as BJP hasn’t offered a waiver. Bandhan (rated ‘buy’) can benefit.

Assam election — Congress proposes waiver, BJP does not: Congress party has proposed to offer waivers to microloan borrowers in Assam for their loans from banks (The Hindu, 21 March). This is in line with expectations seeded since Jan-21. By contrast, the election manifesto of BJP (ruling party) does not propose any loan waivers, which is a positive surprise because in some election rallies it had indicated that it may offer a waiver. Our channel checks had indicated that BJP is a strong contender to remain in power and the mention of waivers by BJP had a bigger negative impact on collections than the mention by Congress.

BJP’s proposal for micro-borrowers in Assam: BJP’s manifesto for Assam states that it will bring about stringent laws to prevent any form of public humiliation or mental torture during recovery of loans by microfinance institutions. Moreover, it will also support the repayment of such microfinance loans, which are availed by poor women who are genuinely unable to repay. Clarity on these aspects/ new laws will be key to watch, but we expect them to be far less damaging than an explicit loan waiver.

WB elections — no waivers announced: The state of West Bengal also heads into election from end-Mar-21 with a close contest between ruling party TMC and key opposition BJP. The election manifestos of both parties were released recently and touch a range of focus areas like the economy, support to low income groups, agriculture etc. Interestingly, both parties do not explicitly propose any waiver for micro-borrowers, which should be a relief for MFIs and Bandhan Bank. Elections start end of Mar-Apr 2021; improvement in collections can offer upside risk to earnings. Earnings rebound can drive rerating. We expect Bandhan Bank’s earnings to rebound post 1HFY22 as credit costs fall from 5% of average loans in FY21 to c.2% over FY23-24 and there is an uptick in disbursements. We rate the stock Buy with price target of `470 based on 3x Mar-23 adjusted PB.