Bandhan Bank: Risks haven't subsided, negatives still outweigh positives

Topics Bandhan Bank

The Reserve Bank of India (RBI) lifted the ban on Bandhan Bank opening new branches
Last Tuesday, the Reserve Bank of India (RBI) lifted the ban on Bandhan Bank opening new branches. Accordingly, the bank now plans to open 250 branches by the end of CY20. While the news seems to have helped Bandhan’s stock — which is down 2.6 per cent since last Tuesday, versus a 5.3 per cent fall in the Sensex — it is still down by over 22 per cent year-to-date because of concerns over slowing growth and asset quality.

Signs of these were visible in its December quarter (Q3) results. Though still high, growth in assets under management or AUM (excluding Gruh Finance) dipped to 33 per cent year-on-year (YoY) in Q3, as against 35-40 per cent in earlier quarters. Further, gross non-performing assets (NPA) inched up to 1.93 per cent, from 1.76 per cent in the September quarter. Investors need to brace for a further slowdown as a recent report by Microfinance Institutions Network (MFIN) indicated that the microfinance (MFI) industry tempered growth in Q3 to 24 per cent YoY, as against 30 per cent-plus growth seen earlier. For Bandhan, MFI accounts for 61 per cent of the total loan book, and Assam (eye of the crisis) accounts for 16.4 per cent of its MFI loans and 10 per cent of loan exposure, second to West Bengal, which accounts for 45.8 per cent of its MFI loans. Another report by rating agency CRIF Highmark noted that delinquencies between 31 days and 180 days have doubled YoY to 1.5 per cent in Q3.

The question also is whether the RBI lifting the curb on the bank’s branch expansion can help it diversify the loan book. Even as the Gruh Finance acquisition gave it a head-start in expanding its non-MFI business, Bandhan seems to have hit an air pocket since then. The share of non-MFI loans remained stagnant at 39 per cent (29 per cent contributed by Gruh) in Q3, indicating that other streams of businesses aren’t helping much yet.  Moreover, promoters of Bandhan Bank have to reduce their stake to 40 per cent, from 61 per cent. Chandrasekhar Ghosh, CEO, Bandhan Bank, had earlier indicated the bank would not explore an inorganic mode of reducing promoters’ stake in the lender, implying that the supply of shares in the open market may remain high. If demand for the stock isn’t encouraging, the scope for a sharp rebound in its price remains limited.

In short, the negatives still outweigh the positives. From nearly all analysts tracking the stock having a positive view on it a year ago, now only 70 per cent of those polled on Bloomberg have a ‘buy’ rating. Even if the valuation at 3.8x FY21 estimated book is attractive, investors should wait for easing of some of the fundamental concerns.

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