Bandhan Bank: Investors should look beyond the headline numbers

Even as asset quality seems stable, factors such as provision coverage ratio and loan book diversification need attention

Bandhan Bank’s stock shed over five per cent on Wednesday, giving up far more than the one per cent it gained post its December quarter (Q3) results published a day earlier. The bank clocking 93 per cent loan growth helped by Gruh Finance acquisition under current condition is laudable. Its asset quality also appears reasonable.

However, investors should look beyond the headline numbers, as aspects such as provision coverage, loan book diversification and profitability do not suggest strength.

At 1.93 per cent gross non-performing assets (NPA) ratio, bad loans have marginally risen by 17 basis points (bps) sequentially, of which 15 bps was attributed to Gruh Finance’s portfolio. However, provision coverage ratio or PCR dipped to 58 per cent in Q3 (lowest since Bandhan’s listing), suggesting that there could be more stress in the coming quarters.

Also, of the Rs 6,500 crore exposure to Assam (10 per cent of total loan book), Bandhan Bank has provided for Rs 200 crore on a prudential basis, which is about three per cent of total exposure. While collection efficiency touched 93.6 per cent in December, up from 78 per cent seen during the peak of the protest, news reports don’t suggest complete normalcy returning even now, which could make Bandhan Bank vulnerable to further asset quality pressure from Assam.

Compiled by BS Research Bureau

Growth in non-microfinance (MFI) business, including Gruh Finance, also seems to be going through tough times, with non-MFI loan assets growing by a crawling pace of 1.5 per cent sequentially to Rs 25,356 crore in Q3. Here too, only the share of loans to micro, small and medium enterprises (MSMEs) to non-MFI loans is up 300 bps sequentially to 23.32 per cent in Q3. While important segments such as retail loans as well as lending to MFIs and other non-banking finance companies hasn’t changed much. In short, dependence of microfinance (MFI) was static at 61 per cent of overall loan book, indicating that its diversification strategy may take longer time to play out.

The other important point is the compression in net interest margin (NIM or profitability) to 7.9 per cent in Q3 from 8.2 per cent in Q2. While NIM compression was anticipated post the Gruh merger, the decline seems to be happening faster than expected. Asset under management grew at 2 per cent sequentially lagging 11 per cent growth in deposit, thus playing a part in NIM shrinkage.

Analysts at ICICI Securities, who remain positive on Bandhan, have downgraded their earnings expectation by 3-4 per cent for FY20 - FY22. “The recent situation in the north eastern state with substantial exposure and integration of Gruh Finance is seen keeping the growth trajectory moderate,” they add.