At Bandhan Bank, asset quality issues play spoilsport in Q1

At Bandhan Bank, asset quality issues play spoilsport in Q1
At Bandhan Bank, asset quality issues play spoilsport in Q1

Summary

The bank’s management expects recoveries to improve from Q2 onwards and that could aid its asset quality outlook. But a meaningful revival in recoveries may not happen in a hurry.

Bandhan Bank Ltd disappointed investors with its muted June quarter (Q1FY24) earnings performance. A particular sore point being a sequential jump in gross non-performing assets (NPAs) to 6.8% in Q1FY24 from 4.9% in the previous quarter.

A spike in this metric was a fallout of two factors. A change in guidelines where stressed loans that were backed by emergency credit line guarantee scheme (ECLGS) got classif-ied as non-performing assets from special mention account (SMA-2) earlier. So, impact on asset quality from this development could be one-quarter pain for the bank. Secondly, slippages were higher in Q1FY24 due to elevated stress largely in microfinance (MFI) business.

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Graphic: Mint

The bank’s management expects recoveries to improve from Q2 onwards and that could aid its asset quality outlook. But a meaningful revival in recoveries may not happen in a hurry.

“The management had earlier guided for a reduction in overall stress pool (Q1FY24: ~12%; FY23: 9.6%); however, we opine recoveries by way of improved collections and repa-yments from government guarantees could take longer, reflecting in a moderate rise in cumulative credit costs," an HDFC Securities Ltd report said. What’s more, at a time when most large banks are reporting double-digit loan growth, Bandhan Bank’s loan growth came at 8% year-on-year (y-o-y) to 98,197 crore. On a sequential basis, loan growth declined by 6.3%. The relatively slower loan growth is mainly on account of seasonal dip, particularly in the MFI segment. Analysts expect the bank’s loan growth to pick-up in coming quarters with the upcoming festival season.

Meanwhile, reacting to Q1 results, Bandhan Bank stock fell 2.6% on Monday. Its performance has been dismal in recent past. In 2023 so far, the stock has declined by around 11%, underperforming Nifty Bank’s 5.7% returns. The lag in returns can be attributed to lingering concerns on sustainability of asset quality improvement.

To be sure, the bank had been building a strong liability franchise. Also, since MFI is seen as a relatively risky portfolio, the bank is div-ersifying into housing finance and retail loan segments. But these factors may not be enough to turnaround the stock’s perfo-rmance as operating efficiencies would take some quarters to playout. “The stock’s re-rating prospects depend on consistent improvement in asset quality metrics and loan growth which could lead to a sustainable return on asset of over 2.5% and return on equity of over 20% in FY24," Yuvraj Choudhary, analyst, Anand Rathi Institutional Equities, said.

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