Customer additions to support Bandhan Bank's near-term growth; stock up 6%

Net interest income in Q2 surged 55%; profit jumped 47%

After being under pressure recently, shares of Bandhan Bank (Bandhan) have seen some recovery this week, following the management's optimistic views on growth after restrictions over branch expansion by the Reserve Bank of India (RBI). Good results for September quarter (Q2) have added to gains, with the stock surging 6 per cent on Wednesday. 

Analysts, thus, now believe Bandhan’s short-term growth may not get impacted much due to restrictions on branch expansion, given the bank's ability to add customers. If Bandhan does live up to expectations, its investors too will benefit.

A 64 per cent year-on-year (YoY) rise in loan book to Rs 317.3 billion in Q2, supported by 27 per cent rise in the number of customers, pushed up Bandhan's net interest income (NII) by 55.4 per cent YoY to Rs 10.8 billion. This, along with a 40 basis point (bp) fall in the cost of funds, led to a 100 bp expansion in net interest margin to 10.3 per cent. 

The rise in share of low-cost current and savings account (CASA) deposits ratio to 37 per cent as of September 2018, from 28.2 per cent a year ago, reduced the cost of funds. Hence, net profit surged 47 per cent YoY to Rs 4.9 billion.

Bandhan expects to sustain its performance with focus on customer acquisition (15-18 per cent annual customer growth target). According to the management, Bandhan has 2,700 borrowers per door-step service centre (DSC), against a capacity of 3,600 per DCS. In addition, average customers per branch are 3,000 against 25,000-30,000 in case of other private banks. This indicates a good opportunity to expand its customer base.

"The Q2 result is in line in with expectations. Considering the customer addition potential and strong power in micro credit, we do not see material impact on Bandhan's growth due to the RBI's action in the near term. Also, with the current tight-liquidity situation in non-banking financial companies, Bandhan will benefit in terms of credit growth as a bank," says Kajal Gandhi, analyst at ICICI Securities.

Stock valuation is likely to remain at a premium given the superior margins, return on assets (4.3 per cent) and profitability, she adds.

A caution, though, is that it has Rs 3.9-billion exposure to IL&FS, which has not yet been provided for. This may increase provisioning, which could weigh on profits.