India’s youngest full-service bank and the eighth most valuable lender Bandhan Bank Ltd’s stock surged almost 7% in response to its first quarter results, a sign that should warn off investors over valuation. After all, this rise comes on top of a 60% surge since the lender got listed on 26 March. The stock is already trading at a rich multiple of 5.3 times its estimated book value for FY20.
But analysts are still gung-ho on the private sector lender which will celebrate its third anniversary in under two weeks. Is this exuberance irrational?
A look at the lender’s growth offers some validation for the premium valuation its stock commands. For the June quarter, Bandhan Bank reported a 52% jump in its loan book that led to 39% growth in its net interest income, the core income a lender earns. That and a 47% rise in net profit was reason enough for investors to celebrate.
While non-microloan disbursals have jumped 59%, much of the increase in the loan book still comes from the bank’s legacy of microfinance. Microloan disbursals grew 108% from a year ago but these inflated percentages are also due to a very low base. Recall that in the first quarter of FY18, loan disbursals had shrunk as microfinance-oriented entities struggled in the aftermath of demonetization. The microfinance book has grown by a mere 1.1% from the previous quarter. Nevertheless, it still constitutes a lion’s share of the loan book.
But the scorching loan growth has left a mark on asset quality. Bad loans formed 1.24% of its loan book on a gross basis, up from 0.93% a year ago. The stock of bad assets has doubled in the last one year. To be fair, collections from micro-borrowers are typically tepid during the first quarter. Even so, it would be wise to watch for the movement of bad loans in the coming quarters.
For now, the results have provided support to the stock’s high valuations.