Markets
Bandhan Bank’s asset quality issues, high credit cost keep investors on edge
Summary
- The bank's valuation, at 1.4x of its adjusted book value for FY24, remains undemanding. But there are too many moving parts that need to be monitored.
Private sector lender Bandhan Bank Ltd ended FY24 on a sombre note. Its stock has lost almost a quarter of its value over the past year owing to its lacklustre financial performance.
Profit after tax increased by a meagre 1.6% to ₹2,230 crore in FY24 and operating profit fell 6.3% to ₹6,640 crore. Even if the base year – FY23 – numbers are adjusted for the net gain of ₹430 crore from the portfolio sold to an asset reconstruction company, operating profit was flat.
Though Q4FY24 results showed a sharp sequential improvement in gross non-performing assets (GNPA) from 7% to 3.8%, this was largely due to technical write-offs of ₹3,850 crore. If the reduction in GNPA had been achieved primarily through recoveries, it would have been a good sign. More importantly, it is better to curb slippages or accretion to GNPA as preventing the problem is better than curing it.
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The emerging enterprise business (EEB) segment, which accounts for ₹3,210 crore of the total GNPA of ₹4,780 crore, showed signs of continued stress based on special mention accounts (SMA) data, albeit at a slightly slower pace.
SMA-2, which is the aggregate of borrowers with loans overdue by 60 to 90 days, remained high at ₹480 crore, even though it was down about 10% sequentially. Tracking SMA -2 is important as there is a higher probability of these loans becoming NPAs, which are defined as loans that have not been paid for more than 90 days.
Asset quality and credit cost
The bank does not face challenges to its growth even as it grapples with asset-quality issues from the high slippage rate. Bandhan Bank grew its balance sheet by 14% in FY24. Deposit and advance growth rates were also healthy at 25.1% and 15.6%, respectively. Its net interest margin (NIM) continued to be one of the highest in the sector at 7.3% in FY24.
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However, bottom-line profitability was diluted significantly by the high credit cost. Other banks earn a lower NIM, but their credit costs are also much lower. For example, SBI and HDFC have a NIM of around 3.5%, but their credit costs are less than a 1% of loans, as against 1.9% for Bandhan Bank, even if entire technical write off is excluded from Q4FY24.
The bank' valuation, at 1.4x of its adjusted book value for FY24, remains undemanding. But there are too many moving parts that need to be monitored amid volatile financial performance. For example, founder and current CEO Chandra Shekhar Ghosh will retire in July and it remains to be seen if the next CEO changes strategy to reduce the accretion of gross NPAs. This is likely to keep investors edgy.
