Mumbai: In its avatar as a bank, microlender Bandhan Bank Ltd has managed to give investors enough to cheer. Its operating metrics have been robust and analysts expect the acquisition of Gruh Finance Ltd to add to its growth rate.

For the September quarter, Bandhan Bank reported a 38% growth in net profit on a sequential basis. It now boasts profits higher than all listed public sector banks put together. The acquisition of Gruh Finance, although costly, has diversified Bandhan Bank’s loan book. More importantly, the lender’s delinquency ratios at 1.8% of its loans make rival envious.

Bandhan Bank Q2.
Bandhan Bank Q2.

But trouble has been brewing for the bank, with challenges to growth in its stronghold region of the north-eastern states. The latest challenge has emerged from protests staged by women borrower groups.

Local media reports said that several women organizations under an umbrella name Jagrata Mahila Suraksha Samaj demanded a ban on microfinance lenders from doing business in Assam.

In a note, analysts at Macquarie Capital Securities India Pvt. Ltd said that 18% of Bandhan Bank’s assets under management is from Assam. Considering this, the biggest hit, if any, would be on the bank.

To be sure, Assam had been a troubled spot for most lenders given the recent floods in the state. Delinquencies for lenders had shown a spike recently.

The 4% fall in the stock on Tuesday indicates that these concerns have affected the sentiment.

In the wake of these challenges, analysts worry that the current valuations are stretched. Of course, the stock was viewed by some as pricey even before the problems in Assam. “At 5.1 times forward PBV (price to book value), there is no margin of safety," analysts at Macquarie said in a note last month.

Moreover, the long-pending issue of promoter shareholding remains. The bank has put in several efforts to bring promoter stake down, the acquisition of Gruh Finance being one of the routes. Promoter shareholding still remains at 82%, far higher than the regulatory level of 40%. In fact, the bank was penalized by the regulator last month for not abiding by the shareholding norms.

The overhang of regulatory non-compliance continues to weigh on investor sentiment. Bandhan Bank’s Achilles heel is not the challenges to its balance-sheet growth, but it’s regulatory non-compliance risk from high promoter stake. Until the promoter shareholding is dealt with, the stock is unlikely to see a rerating. Meanwhile, investors would do well to keep an eye on the developments in Assam.