Bandhan Bank's Q2 results show positive impact of diversification

Net interest margin has started to come off from the 10 per cent plus mark as proportion of lower-yield mortgages rise

One of the salient advantages of the recently concluded merger with Gruh Finance was that it would allow Bandhan Bank an opportunity to diversify its book, which prior to the merger was largely restricted by micro finance or MFI loans. Bandhan Bank, which was taking baby steps to enter into non-MFI loans, saw proportion of these loans jump three-fold to 39 per cent in September 2019 quarter (Q2) from 13 per cent a year-ago. With the bank’s book now beginning to take the shape of a universal bank or one that offers a multitude of loan products, its financials in Q2 is also starting to reflect these underlying changes in the loan book composition.

The most visible impact was felt in the yield and net interest margin (NIM). With the relatively lower-yielding portfolio of Gruh Finance reflected in Bandhan’s books yields shrunk from 15.3 per cent last year to 14.2 per cent in Q2, while NIM also came off significantly from the 10 per cent plus mark (a characteristic of a MFI book) to 8.2 per cent in Q2.

While part of these changes were anticipated by the Street, the overall financials did get a boost in Q2. Net interest income grew by 42 per cent in Q2, while profit before tax increased by 55 per cent, on a year-on-year basis. Gross non-performing assets ratio at 1.76 per cent marginally rose from 1.70 per cent sequentially, though the increase isn't alarming. Analysts at ICICI Securities say Bandhan’s Q2 is largely in-line with expectations and the bank has reported steady set of numbers on growth, asset quality as well as operational performance.

However, from a business perspective what needs to be monitored is the composition of the loan book. While the non-MFI book did diversify, contribution of retail loans (excluding mortgages) has shrunk from 18.8 per cent in FY19 to 6.6 per cent in Q2. In fact, lending to other MFIs is also on the rise. Given the current market condition, Bandhan Bank does face some concentration risk. While efforts to reduce the share of MFI loans to overall portfolio is appreciated, focus should also be on building a granular retail book. The other concern for investors is the potential equity dilution as promoters of Bandhan Bank need to further reduce their holding to 40 per cent. This is after the merger with Gruh Finance helping them reduce their holding to 61 per cent from 82 per cent earlier.

Therefore, while results may be favourable, investors must be wary of these risks before taking fresh exposure in the stock, which closed 2.5 per cent higher on Thursday.