Affordable housing business likely to boost outlook for Bandhan Bank

Impact of RBI restriction on branch expansion offset by deposit base

After months of subdued sentiment, recent developments suggest Bandhan Bank's investors can expect better times ahead.

A slash in the goods and services tax (GST) from 8 per cent to 1 per cent on affordable housing — announced earlier this week — has provided some relief to investors. The development should provide an upward thrust to the recently approved acquisition of Gruh Finance — an affordable housing arm of HDFC.

Subdued demand in the real estate sector had made investors pessimistic about growth of the expensive acquisition by Bandhan. “With lower GST, demand should improve in affordable housing. This is likely to aid loan book growth of lenders such as Gruh that focus mainly on the affordable space,” says Prakash Agarwal, head (BFSI rating) at India Ratings. Retail loans account for 95 per cent of Gruh’s loan book. 

Bandhan’s skill and expertise in rural-focused microfinance will also help its housing finance business despite high competition.

Once complete, the Gruh acquisition will help lower Bandhan’s promoter stake from 82.3 per cent to 61 per cent. Last September, the Reserve Bank of India had restricted Bandhan from taking up branch expansion, for not reducing promoter stake to 40 per cent within the stipulated period. 

Therefore, the stock that had listed at a 33 per cent premium in March 2018, plummeted 31 per cent over the last six months, versus a 3.6 per cent fall in the Bank Nifty. Additional measures to further lower the promoter stake should help the bank overcome the restriction in branch expansion.

Nevertheless, in its core banking business, Bandhan has shown its ability to build a strong deposit base, which finances its loan book. Nomura says, “Within just 3.5 years of becoming a bank, Bandhan recorded a current and savings account (CASA) ratio of 37 per cent, during April-September 2018.” 

At 41 per cent as of the December quarter, it is close to many big private players. Despite the restrictions, Bandhan's deposits were up 37 per cent year-on-year as of December 2018, against a meagre 9 per cent growth for the banking sector. 

Bandhan is expected to continue posting good deposit growth, given it can easily pass on the high deposit cost to borrowers mainly from the microfinance business, and sustain its attractive margin profile. 

Even in the December 2018 quarter, Bandhan's net interest margin expanded by 90 basis points year-on-year to 10.5 per cent. All this should hopefully help regain investor confidence in the stock, which is up 19 per cent in February.