Bandhan Bank gains over 2% as RBI lifts restrictions on CEO's remuneration

During June quarter of FY21, the private bank reported 32 per cent fall in the net profit at Rs 550 crore as against Rs 804 crore in the previous-year period
Bandhan Bank shares gained 2.4 per cent to quote at Rs 294.4 per share on the BSE on Tuesday after the Reserve Bank of India lifted the restrictions imposed on the remuneration of private lender Bandhan Bank’s managing director and chief executive officer (MD&CEO) – Chandra Shekhar Ghosh, after the bank's promoter, Bandhan Financial Holdings, reduced its stake in the bank to 40 per cent by offloading 21 per cent stake earlier this month, to meet the regulator’s ownership norms.

At 9:34 am, the stock was trading 1.8 per cent higher at Rs 292.6 apiece on the BSE as against 205 points, or 0.54 per cent, rise in the benchmark S&P BSE Sensex. A combined 4.12 million shares had changed hands on the counter on the NSE and BSE till the time of writing of this report. 

"The RBI vide its communication dated August 17, 2020 has lifted the other regulatory restriction on the remuneration of the MD & CEO of the Bank stands frozen, at the existing level," the bank said in a regulatory filing. Earlier, on February 25, the RBI had withdrawn the restriction imposed for obtaining prior approval of RBI for opening of banking outlets.

"Consequent to the above, all the regulatory restrictions imposed by the RBI vide letter dated September 19, 2018, on the Bank are now withdrawn," it added. READ HERE

Under the restrictions imposed by the RBI in September 2018, the bank was required to take prior approval from the regulator for opening of any new banking outlets and the remuneration of the MD & CEO of the bank was frozen, at the current level, as the bank’s promoters failed to comply with licensing requirements of reducing their stake in the bank. 

According to RBI’s licensing norms, any bank offering ‘universal’ services needs to bring down the promoter’s stake to 40 per cent in three years from the date of commencement of operations. Earlier this month, the promoter - Bandhan Financial Holdings (BFHL) - sold nearly 337.4 million shares at a minimum of Rs 311 apiece to raise Rs 10,500 crore. The stake sale was done through multiple block deals on the stock exchange platform. After the stake sale, the promoter’s stake has come down to 40 per cent from 60.96 per cent.

So far in the month of August, the stock of the lender has tumbled 16.5 per cent till Monday, as against 1.2 per cent gain in the benchmark S&P BSE Sensex.

During June quarter of FY21, the private bank reported 32 per cent fall in the net profit at Rs 550 crore as against Rs 804 crore in the previous-year period due to seven times rise in provisions and contingencies. During the quarter it took accelerated additional provision on standard advances amounting to Rs 750 crore to cover the Covid-19-related credit risks. Total provisions stood at Rs 849 crore as against Rs 125 crore.

Analysts at Motilal Oswal Financial Services believe Bandhan Bank provided a high quantum of provisions toward Covid-19, which affected earnings, even as net interest income/Pre-provision profit growth held strong. "The bank now holds total Covid-19-related / excess standard provisions of Rs 1,770 crore (2.5 per cent of loans) for use toward higher delinquencies once the
moratorium period ends... Deposit growth stood strong, with the CASA ratio improving further and retail deposit proportion being largely stable. We expect credit cost trends to remain elevated at 2.4 per cent for FY21E," they said in a post-result review report. The brokerage has 'Buy' call on the stock with a target price of Rs 425.

"Bandhan has been quite conservative in its provisioning policy, proactively increasing provisioning buffers whenever required. It has increased provisioning on its microfinance loans to nearly 5 per cent and overall book at 3.5 per cent - one of the highest in the system. Separately, on the deferred loans (moratorium loans), Bandhan is carrying 8.6 per cent provisions compared to 6.1 per cent for HDFC Bank and 10.8 per cent for Bajaj Finance," wrote analysts at Goldman Sachs in a report dated July 27.

The analysts believe a strong deposit franchise would not only help Bandhan Bank have a stable and low-cost liquidity base but also support the bank to acquire a better quality portfolio in its other businesses. "In our view, this would help de-risk the business to a great degree without diluting the return ratios," they added. The brokerage has a 'buy' rating on the stock with a 12-month target price of Rs 395.

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