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Bandhan Bank: Concerns on MFI portfolio an overhang

Brokerages have lately turned optimistic though Q4 results hold key for sentiments to improve

bandhan bank
The good thing for now is that after the initial wave of political uncertainty in Assam, when the microfinance Bill was introduced in December, there has been no further progress on it.
Hamsini Karthik Mumbai
3 min read Last Updated : Mar 18 2021 | 11:01 PM IST
The Bandhan Bank stock has gained over 40 per cent in a year, indicating that concerns aired last year — regarding the impact of the lockdown on its business — have subsided to a large extent. 

However, for a full-blown improvement in sentiment, the upcoming March quarter (Q4) results hold key, as asset quality issues have resurfaced, particularly in the microfinance (MFI) business, which accounts for 65 per cent of the total. At over 7 per cent gross NPA ratio, without considering the Supreme Court’s stay on asset classification, Q3 was Bandhan Bank’s worst in years.

The good thing for now is that after the initial wave of political uncertainty in Assam, when the microfinance Bill was introduced in December, there has been no further progress on it. 

Likewise, fears of a loan waiver ahead of state polls, particularly in West Bengal, which accounts for 47 per cent of Bandhan Bank’s MFI book, have been put to rest with analysts at Jefferies highlighting that waiver for micro-borrowers did not find mention in the state’s ruling party’s election manifesto.

Recent brokerage reports, including those of CLSA and Goldman Sachs, indicate that should the MFI segment remain a trouble point for Bandhan, given that it has already provided Rs 3,200 crore so far in FY21, the lender is well positioned to absorb additional shocks estimated between Rs 4,300-6,300 crore. “We believe that even if the entire 30 days past due were to slip into NPAs in the MFI portfolio, it would be lower than our slippage assumptions for Q4 and FY22,” say analysts at Goldman Sachs. For now, the brokerage is forecasting 40 per cent provisions on incremental stressed loans. “If this goes up to 60 per cent, our analysis suggests the impact would be fairly manageable at 13 per cent of FY22 estimated pre-provisioning profit,” they add.

Apart from asset quality issues, there are uncertainties around the likely regulatory changes for the MFI sector. The Reserve Bank of India (RBI) is in the process of harmonising norms across all categories of MFIs. The favourable aspect, as indicated by Jefferies, is that borrowers exclusive to Bandhan Bank is at 50 per cent and another 20 per cent customers have taken loans from another lender. “We estimate the impact would be on 20 per cent of its client base, which is likely manageable if RBI offers the lenders a reasonable glide path for achieving this transition,” they add.

For now, with valuations remaining subdued at 2.2x FY22 estimated book, down from its historic levels of 4.8x, analysts reckon Bandhan Bank as a play on valuations. However, investors averse to risk would be better off waiting for Q4 results and the management commentary before they accumulate the stock.

Topics :Bandhan BankMFIs

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