Portfolio concentration weighs on Bandhan Bank, stock down 13% post results

Dependence on microfinance loans for growth is steadily increasing, which poses a risk in present environment

Bandhan Bank’s dominance in eastern India helped it bring in retail deposits (80 per cent of total deposits) and augment the share of its low-cost current account savings account (CASA) deposits to 43 per cent in the December quarter (Q3). 

However, its stock has lost about 13 per cent in two session after it announced its results, because its growing dependence on microfinance institution (MFI) loans is doing more harm than good at this juncture. 

Proforma gross non-performing assets (NPA) ratio — or NPAs unadjusted for the Supreme Court’s stay on bad loan recognition — rose to 7.1 per cent in Q3, the highest since its listing in 2018. Provisioning cost ballooned from Rs 295 crore last year to Rs 1,069 crore in Q3 (Rs 395 crore in Q2), indicating a stark deterioration in asset quality. 

According to the bank, 76 per cent of its loan book is less than 30 days past due (DPD), five per cent within 30-60 DPD, and 10 per cent in the 60-90 DPD bulge. 

Analysts at Kotak Institutional Equities note that about 24 per cent of its MFI book falls in the overdue category. The recent Assam MFI Act is not only hurting the bank’s collection efficiency, but also denting its financials. Net profit in Q3 declined by 13.5 per cent year-on-year (YoY) because of the Assam-related stress. 

Absence of an encouraging trend in collection efficiencies is another worry. 

While collection efficiency improved from 89 per cent in September to 92 per cent in December, it fell to 90 per cent in January for MFI loans.  

Even in Bandhan’s critical market of West Bengal, analysts at Motilal Oswal Financial Services note that as consumer demand has not yet revived fully, collection efficiency has also not returned to normal. 

Under these circumstances, the bank’s continued focus on the MFI space isn’t comforting. In Q3, advances grew by 22.6 per cent, while MFI advances grew by 32 per cent. Other segments, predominantly the mortgage book through Gruh Finance’s acquisition, grew by only seven per cent. Share of MFI loans has risen to 66 per cent in Q3 from 61 per cent a year-ago. The mortgage book has been a laggard. 

By 2025, the bank is planning to reduce dependence on MFI loans to 30 per cent and increase focus on mortgage loans to 30 per cent, though the current trend isn’t reflecting that. After Q3 results, analysts have sharply cut their earnings estimates by 7-11 per cent due to near-term stress in MFI loans. 

Therefore, to win back Street’s confidence, it’s important for the bank to grow beyond its comfort zone.