Bandhan Bank: Look beyond headline numbers Provision coverage ratio, loan book diversification warrant attention - Business Standard
16-Jan-2020 01:25:17 AM
The Bandhan Bank stock shed over 5 per cent on Wednesday, giving up far more than the 1 per cent it had gained following its December quarter (Q3) results, published a day earlier. The 93 per cent growth in its loan book, helped by the acquisition of Gruh Finance under current conditions, is laudable.
Asset quality appears reasonable, too. However, investors should look beyond the headline numbers, as aspects such as provision coverage, loan book diversification, and profitability do not hint at much strength.
At 1.93 per cent gross non-performing asset (NPA) ratio, bad loans have marginally risen by 17 basis points (bps) sequentially, of which 15 bps was attributed to Gruh Finance’s portfolio.
However, provision coverage ratio or PCR dipped to 58 per cent in Q3 (lowest since listing), suggesting that there could be more stress in the coming quarters.
Further, of the ~6,500-crore exposure to Assam (10 per cent of total loan book), Bandhan Bank has provided for ~200 crore on a prudential basis, which is about 3 per cent of the total exposure.
While collection efficiency improved to 93.6 per cent in December from 78 per cent during the peak of the protest, news reports don’t indicate complete normalcy returning even now, which could make the lender vulnerable to further asset quality pressure from Assam.
Growth in non-microfinance (MFI) business, including Gruh Finance, also seems to be slowing, with non-MFI loan assets growing at a paltry 1.5 per cent sequentially to ~25,356 crore in the quarter under review.
Here too, only the share of loans to micro, small and medium enterprises (MSMEs) viz-a-viz non-MFI loans has risen 300 bps sequentially to 23.32 per cent. Important segments such as retail loans, as well as lending to MFIs and other non-banking financial companies, hasn’t changed much.
In short, dependence of microfinance (MFI) was static at 61 per cent of the overall loan book, indicating that its diversification strategy may take longer to play out.
The other important factor is the compression in net interest margin (NIM or profitability) to 7.9 per cent in Q3, from 8.2 per cent in Q2.
While compression in NIM was anticipated after the Gruh merger, the decline seems to be happening faster than expected.
Assets under management grew at 2 per cent sequentially, lagging the 11 per cent growth recorded in deposits, thus playing a part in NIM shrinkage.
Analysts at ICICI Securities, who remain positive on Bandhan Bank, have downgraded their earnings expectation by 3-4 per cent
for FY20-22.
“The recent situation in the north-eastern state with substantial exposure and integration of Gruh Finance is seen keeping the growth trajectory moderate,” they add.