Bandhan Bank: Worst over, but investors will need to have patience

A reversal in stress in microfinance and housing loan segments is crucial to improve sentiment

Bandhan Bank declared a massive loss in Q2FY22 on the basis of accelerated provisioning. The breakup of NPAs indicated that the highest level of distress is in the MFI sector with a concentration centred on West Bengal and Assam.

The stock market reacted with disappointment. Some analysts held onto Buy and Hold recommendations despite a promise of more near-term pain. Every analyst has cut the earnings estimates however. The management believes the worst is over, and the trend is improving. The bank said collection efficiency has increased.

The bank declared a net loss of Rs 3,008 crore, with a massive provisioning of Rs 5,578 crore. This was versus a declared profit of Rs 373 crore in Q1, 2021-22 and a declared profit of Rs 920 crore in Q2, 2020-21. Total income rose 3 per cent YoY with Rs 3,673 crore and it was down 8 per cent QoQ versus Rs 4,010 crore in Q1, 2021-22. Of this Net Interest Income was Rs 1,935 crore, while fee and other income was Rs 492 crore, which was a drop of 8.5 per cent QoQ versus Rs 2,114 crore. The NIM dropped to 7.6 per cent, versus 8.5 per cent in Q1.  

Provisions at Rs 5,578 crore, was far higher than Rs 1,442 crore in Q1. Gross NPAs rose to 10.8 per cent of assets, compared to 8.2 per cent QoQ (1.2 per cent YoY). Net NPAs were at 3.04 per cent versus 3.3 per cent QoQ (0.4 per cent YoY). Restructured loans plus GNPA equalled 21 per cent of the book.

The guidance estimated the total stressed book of Rs 19,500 crore is largely covered, by accumulated provisioning of Rs 9,500 crore, and expected recoveries, (excluding Assam) of Rs 9,000 crore. The bank expects customer repayments of Rs 6,000 crore and the rest Rs 3,000 crore recovery from the CGMFU (Credit Guarantee Fund for Micro Units). It was cautious about Assam recovery.

If this estimate is accurate, provisioning should fall to a more normal run of Rs 4,000 crore - 4,500 crore in Q3, 2021-22. The Provision Coverage Ratio was at 74 per cent with reference to GNPAs and at 47 per cent to the total pool of stressed loans.

The Emerging Entrepreneurs Business segment, (essentially microfinance), is the most distressed. Total EEB stress is at 36 per cent and 68 per cent of Assam EEB loans are stressed while 42 per cent of West Bengal EEB loans are stressed. EEB stress in the Rest of India is 21 per cent. GNPAs are at 13.6 per cent in this segment but the number of customers paying nothing is down to 4 per cent in September 2021, from 9 per cent in June 2021. The housing segment also has a stress rate of 10.4 per cent. The EEB segment amounts to almost 57 per cent of the loan book with housing at around 24 per cent. The bank intends to change the mix, bringing EEB down to 30 per cent by 2025.

MFI loans are hyper-sensitive to distress in the unorganised sector, and these results are a bad signal for the rural economy in general, especially eastern India. Positive surprises on this front including improvements in West Bengal and Assam could be key. The stock closed at Rs 291. The momentum is negative, with a possible downside till support at Rs 275, with another support at Rs 260.