Bandhan's operating metrics justify valuation; Q1 net profit up 48%

The Bandhan Bank's stock hit a new high of Rs 607.5 on the BSE after the bank reported strong June quarter results on Wednesday. The stock closed with a gain of 6.8 per cent at Rs 600.1. 

With this, the bank's current valuation is 5.3 times its FY20 estimated book value, highest in the banking industry. Yet, analysts believe it deserves such valuations. "With strong operating performance, earnings growth potential and robust capital base (capital adequacy at 32.6 per cent in the first quarter or Q1), the stock deserves premium valuation, compared to other private banks," says Manish Oswal, analyst at Nirmal Bang.

Its net interest income (NII) or a difference between interest earned and expensed surged 40 per cent over a year to Rs 10.4 billion. This was for a sharp 52.4 per cent increase in advances (almost flat sequentially due to seasonality), driven by the micro finance book (85 per cent of total advances), which grew 44 per cent (extrapolated from composition of advances in the company presentation). Surprisingly, Bandhan clocked over twofold rise in non-micro credit, taking up its share to 15 per cent, from 10 per cent a year before. 

Though the increasing share of non-micro credit (fully secured) gives comfort on asset quality, it weighs on profitability, as yields are relatively lower compared to the micro book. "A change in product mix with a rise in the non-micro credit portion lowered the overall yield during Q1," said the bank's management in an analysts' call. 

Thus, NII contracted 50 basis points (bps) over a year to 10.3 per cent; sequentially, it was up 100 bps, with the share of non-micro credit being up marginally. Nevertheless, a 10 per cent level of margin, supported by a rise in share of low-cost current and savings account deposits (35.5 per cent, from 26.3 per cent in the year-ago quarter) and the bank expecting to maintain NIMs, is impressive. Net profit soared 47.5 per cent over a year to Rs 4.8 billion.

Importantly, Bandhan maintained asset quality, with gross non-performing assets (NPAs or bad loans) stable at 1.3 per cent of advances as of June 30. Overall credit cost (total provisions divided by advances) fell to 78 bps in Q1, from 151 bps as of end-March. The bank expects to end FY19 with one per cent credit cost, versus 1.51 per cent at the end of FY18. All these should keep investors content.