Do nice boys finish last? Bandhan Bank Ltd’s promoters probably know the answer since they are in a race to meet regulatory rules on shareholding.
It is a tough road and the stock is already paying a price, having fallen since the beginning of the year. One of the lender’s much larger competitors, Kotak Mahindra Bank Ltd, chose rather to take the regulator to court on the shareholding issue, and its shares are doing much better.
Investors didn’t show Bandhan Bank any love after a strong performance in the June quarter (Q1) either. The lender continues to report robust growth and low toxic level in loans.
Indeed, small is not only beautiful, but it is highly profitable, too. Bandhan Bank beat Street estimates for the second time by reporting a sharp 45% jump in net profit for the June quarter against an expected modest increase of around 30% by the Street.
That this profit growth came on the back of strong core income growth of 36% was another reason to rejoice.
The lender managed to maintain its asset quality metrics and even ramped up provisioning to be safe. Gross bad loans were 2.02% of its loan book that expanded to a healthy 39% for the June quarter.
Provisions were raised by 56% from a year ago, which meant that its coverage ratio also improved. Having realized its folly of lending to large companies, when its strong point was basically microloans, Bandhan Bank is now back to focusing on such small loans again.
The growth in non-microloans has decelerated and the bank’s overall loan book, too, is growing slower than before because of this. Microloans continue to grow near long-term average for the bank.
To be sure, loan growth has decelerated over the last one year. Another worry is the sharp fall in the share of low-cost current account savings account (CASA) deposits on a sequential basis. The CASA ratio dropped from 40% in the March quarter to 36.06% as of June end. That said, it is still higher than a year ago.
The stock trades at a multiple of almost four times its estimated book value for FY21. That is lower than Kotak Mahindra Bank’s multiple of five times, even though Bandhan Bank’s lower base means its growth is likely to be higher.
As pointed out earlier, investors still worry that the bank has given no clear road map as to how the promoter stake would come down to the permissible level of 40%. While announcing the Q1 results, too, the management had not thrown any light on this.
The last attempt of the bank to shed promoter weight, through the acquisition of Gruh Finance Ltd, was a costly one, and the effect of it is yet to play out on the books of Bandhan Bank.
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