Two factors that buttressed micro lender Bandhan Bank’s steep valuations have taken a beating in the last two quarters. The bank’s strong loan growth has come off and troubles from Assam have hit asset quality.
No wonder, Bandhan Bank’s shares dropped by 5% on Wednesday. On Tuesday, the lender had reported a net profit growth marginally below analysts’ estimates. The worry is that the north eastern state of Assam and even other states may increase stress on the bank’s loan portfolio sharply in the coming months.
The unrest in Assam highlighted with several political protests over the past few months have hit business and 10% of Bandhan Bank’s loan book comes from this state. Ergo, growth took a hit and beyond the merged Gruh Finance Ltd;s book, loan growth was far lower than what Bandhan Bank has been delivering in the past. The adjoining chart shows the slowdown in loan growth clearly.
Asset quality too took a hit although gross bad loans at 1.93% of the loan book may not look overly worrying. The stress can be gauged by the extent of provisions the bank has made. Bandhan Bank doubled its provisions by setting aside ₹200 crore towards standard assets, as on-time repayments dipped to 93% in the December quarter at Assam, from 98% the previous quarter. The bank’s managing director Chandra Sekhar Ghosh has assured that collections are returning to normalcy.
Investors don’t seem to be mollified, especially when the stock trades at a multiple of over four times its estimated book value for FY21. That is higher than the multiple at which HDFC Bank shares trade.
The question is whether Bandhan Bank’s stock is due for a re-rating. To be sure, analysts have cut earnings per share estimates for the next two financial years taking note of the slowdown. Kotak Institutional Equities has cut EPS estimates by a steep 9-10% for FY21-22.
To be fair, micro lending is a business rife with risks that the lender has little control over. India’s youngest bank’s future depends on how deftly it can navigate the stress from north eastern states and some are hopeful its past experience will come in handy. “We believe Bandhan’s long-standing track record in the region, inherent franchise strengths (like customer loyalty, high-touch model) should help Bandhan navigate current environment without significant challenges in our view," analysts at JM Financial Institutional Securities Ltd in a note.
Sure, the bank’s managing director Chandra Shekhar Ghosh has said that considering its long history in the eastern and north eastern states, the lender can withstand future shocks too. But investors would want to wait for actual improvement in the balance sheet to place their faith.