Bandhan Bank stock weighed down by weak sentiment; worst may be priced in

The guidance is for overall 20 per cent growth in 2022-23

Bandhan Bank suffered downgrades following a disappointing first quarter of the 2022-23 financial year (Q1FY23). Floods in Assam affected the bank which has a lot of exposure in the state. The gross non-performing assets (NPA) trends was poor and so was the SMA-2 (special mention accounts category-2) trend of accounts (where loan payments are overdue by between 61-90 days). The credit cost guidance has risen. Declassification of certain priority sector loans (PSL) has also adversely affected the bank. But there has been growth, for example, in the mortgage segment, and increasing investment is likely. 

Loans qualifying as PSL dropped to Rs 56,400 crore in 2021-22 (about 57 per cent of advances) from Rs 74,400 crore in 2020-21 (88 per cent of advances). This was due to a change in PSL reporting policy. The Reserve Bank of India (RBI) direction was to declassify landholding of small and marginal farmers, and investment in plant and machinery for eligibility under the micro enterprise category. RBI asked the bank to appoint an independent auditor for PSL status assessment of these loans and as per reports, there is likely to be no PSL shortfalls/declassifications in future. 

But in 2021-22, Bandhan had to purchase PSL certificates of Rs 19,000 crore and also invest in Rural Infra Development Fund to the tune of Rs 3,300 crore to compensate for declassifications. The investment in RIDF has further increased to Rs 6,000 crore after Q1FY23.

Collection efficiency dropped in Assam and West Bengal. In Assam, floods disrupted collections and Bandhan reported decline in collection efficiency from 92 per cent (March 2022) to 85 per cent (including NPAs) and to 72 per cent (including restructured pool as well) in June 22. Improvement in collection efficiency is likely by September.

In Bengal, collection efficiency, including NPA accounts (excluding restructured ones) was down to 92 per cent in June 22, from 96 per cent in March 22. Lower collection efficiency was also seen in the rest of India, to 94 per cent, by June 2022 (98 per cent in March 22). 

In Q1FY23, Rs 2,750 crore of the March 22 restructured pool moved out of moratorium, but the bank could recover only Rs 250 crore. Another Rs 2,140 crore is moving out of moratorium in Q2FY23 and further rise in delinquency is likely. In Q1, both the SMA-2 and SMA-1 (overdue by 31-60 days) pools saw a rise for all India, with big spikes in Assam and Bengal. In Q1, the bank took provisioning of Rs 640 crore leading to credit cost of 2.7 per cent. The credit cost guidance for FY23 is 2.5 per cent and this could be exceeded. 

The bank hopes to recover Rs 2,500 crore from the Credit Guarantee Fund for micro units with the first tranche by October 2022. It holds 60 per cent market share in the Assam government’s relief fund of Rs 1,500 crore (total relief) for delinquent loans. It has been conservative in provisioning. 

Bandhan is looking to open over 500 branches in FY23, mostly outside Assam and West Bengal and it’s investing in technology. This means high opex, with a guidance of opex to assets in the range of 2.6-2.7 per cent. It has raised its deposit and interest rates. Taken together, this means likely margin compression for next 2 years.

The guidance is for overall 20 per cent growth in FY23. The focus is growing non-microfinance institutions or MFIs (including mortgages, gold) and reducing the MFI share to 45 per cent from current 60 per cent. 

The stock has seen a huge sell off, from Rs 306 earlier this month to Rs 253 before recovering over the last two trading sessions to Rs 266.65. Some analysts have ‘buy’ and ‘hold’ recommendations with 12-month targets ranging from Rs 340 to Rs 408.