Bandhan Bank: RBI's rap on knuckles brings new worries for investors

Even if financials aren't destabilised in the near-term, the stock may remain under pressure until promoters firm up on stake reduction

Investors were in no mood to forgive the Bandhan Bank stock after Reserve Bank of India’s (RBI’s) diktat to freeze its MD & CEO’s remuneration. RBI’s action is a fallout of the bank’s promoter entity -- Non Operative Financial Holding Company (NOFHC), not reducing its stake from 82 per cent to 40 per cent in three years starting August 2015, as required by the universal banking norms.

Once the news came after Friday’s market closing, the stock faced with heavy selling and hit the lower circuit on Monday. This is despite the management’s attempt to pacify investors in Saturday’s conference call.

Experts say the stock may continue to remain under pressure for a while. “Large investors feel the bank has been too lax in complying with RBI’s mandate,” says a fund manager who believes that the stock is highly vulnerable to further correction. “They may shy away from taking fresh exposure till they see the promoters reducing their stake,” he adds.

Also, a shake-up in the bank's return ratios and profitability appears highly probable in the medium to long term. Any form of stake dilution, whether a merger with another bank or an acquisition or NOFHC pursuing other non-banking opportunities can highly dilute the bank’s earnings and return ratios. Accordingly, analysts at ICICI Securities have reduced their target multiple (price-book value) from 6x FY21 estimates to 4.7x. “The stock could hover at corrected levels till there is clarity from the management,” they add.

Meanwhile, in the next two quarters, operations at Bandhan Bank’s existing network of 937 branches may be under intense pressure. As further branch expansion would require prior RBI approval, the bank needs improve its utilisation to ensure growth. In a call with analysts, the bank revealed that it currently handles about 3,000 customers per branch, which is abysmal compared to 20,000-25,000 customers handled by other commercial banks. While the bank did plan to slow down on branch expansion upon reaching the 1,000 mark, whether it can afford to do so when its peers are chasing low-cost deposits to keep a tab on cost of funds needs to be seen.

In short, investors of Bandhan Bank may have to swallow the bitter pill until RBI removes its tab on the bank. Long-term investors have to rebalance their earnings expectations.