Asset quality worries weigh on Bandhan Bank's stock as NPAs spike

Analysts have 'neutral' to 'buy' recommendation on the share with target price ranging between Rs 320 and Rs 440, it closed at Rs 273 on Monday

The market responded negatively to Bandhan Bank’s results. Despite a jump in earnings, the bank had deteriorating asset quality and higher NPAs (non-performing assets). The profit after tax (PAT) was at Rs 886 crore, up 140 per cent year-on-year (YoY) but down 53 per cent quarter-on-quarter (QoQ). 

Interest income, at Rs 4,055 crore, was up 5 per cent QoQ and up 19 per cent YoY. Other income was down 66 per cent, QoQ, at Rs 330 crore. Net interest income was down 1 per cent and up 19 per cent YoY at Rs 2,514 crore. Net interest margin is close to 8 per cent and provisioning is at Rs 642 crore, down 56 per cent YoY from Rs 1,461 crore.

Gross NPAs were assessed at Rs 6,967 crore, up 8 per cent YoY from Rs 6,440 crore, and up 9 per cent from Rs 6,380 crore (QoQ). Net NPAs were reported at Rs 1,749 crore, up 12 per cent QoQ from Rs 1,564 crore and down 29 per cent compared to Rs 2,457 crore YoY. Net NPAs were at 1.9 per cent of assets, while gross NPAs were at 7.3 per cent -- both saw sequential deterioration from Q4, 2021-22 (Q5FY22). The provision coverage ratio (PCR) remained stable at around 75 per cent. The special mentions accounts, which is a measure of early/potentially stressed loans, however, almost doubled while collection efficiency declined due to floods.

The management guidance was that decline in the microcredit book is due to seasonality, floods in Assam, and new Reserve Bank of India (RBI) regulations for MFIs (micro finance institutions). The fall in other income was due to weak treasury performance (due to rising rates) and lower fee income on account of smaller disbursements and lower sale of PSLC (priority sector lending certificates). Around 57 per cent of customers from the restructured portfolio paid some instalment, while 73 per cent customers from the NPA pool made some payments.

However, the management believes in a continued improvement in asset quality and steady trend in loan growth rates. The management guidance is that credit costs will be around 2.5 per cent for FY23 but given the NPA situation, this may be an underestimate. Especially given the high probability that the RBI will keep pushing rates up.

The balance sheet is under some pressure given stressed loan levels. Adequate provision cover seems to exist to absorb the eventual losses. Note that there are loans which are now past the moratorium period so slippage calculation is difficult.

The bank is also shifting away from MFI lending, which is a good sign so far as loan slippages are concerned. The housing loan segment grew 27 per cent YoY and 4 per cent QoQ. The bank previously outlined long-term plans to diversify the loan mix and geographical presence. Management indicated that on account of disruptions from the Covid-19 wave, it will defer the target of this asset book realignment plan to FY 2025-26. It targets MFI exposure to reduce to 30 per cent from around 47 per cent currently. Micro-banking branches will also try to push products like housing loans, gold loans and consumer loans to micro-banking customers.

Various analysts have recommendations ranging from ‘neutral’ to ‘buy’ with valuation targets ranging between Rs 320 and Rs 440. However, on Monday, the stock slipped 4.35 per cent on heavy selling to end at Rs 273.80 from the previous level of Rs 286.25.