Bandhan Bank Ltd - Stock Valuation and Financial Performance

Bandhan Bank has shown early signs of improving its credit cost as well as asset quality.

Bandhan Bank maintained healthy business growth in Q1FY25, Deposits grew 22.8% YoY, higher than the advances growth, supported by 24.9% YoY growth in retail term deposit. This lead to NII growth of 21% YoY. Net interest income (NII) for Q1 FY25, stood at Rs.3,005 Cr compared to Rs.2,491 Cr for Q1 FY24.

Loan book growth was driven by Retail book (other than housing) which grew 83%, Commercial Banking grew 30%, EEB grew 22% and the housing book showed a growth of 13%.

On the liability side, deposits growth was mainly driven by term deposits (25% YoY); CASA grew 14% YoY but declined 360 bps QoQ. CASA growth was impacted due to reduction from short term current account balance of previous quarter. CASA ratio stands at 33.4%  compared to 36% in Q1FY24.

Asset Quality

In last quarter bank had taken strategic decision to write off Rs 3,850 Cr of stressed assets. We had highlighted this in our previous quarterly update. Higher write-off helped the bank to improve its overall asset quality which is visible in this quarter.  The bank's Gross Non-Performing Assets (NPA) have improved YoY to 4.2% in Q1 FY25 compared to 6.8% in Q1 FY24. Net NPA improved to 1.1% in Q1 FY25 vs 2.2% in Q1 FY24.

Gross slippages were lower at Rs. 890 Cr vs. Rs. 1,020 Cr in Q4FY24 and Rs. 1,360 Cr in Q1FY24. We have been cautious on the credit cost for the bank. But bank has shown early signs of improving its credit cost. For the Q1FY25 credit cost stood at 1.6% compared to 2.4% in Q1FY24. The commentary around MFI asset quality stress build-up across lenders has been alarming. Given Bandhan’s higher exposure to the MFI segment (49% portfolio mix), we remain watchful of asset quality metrics going ahead.The bank guided for credit cost of 1.8%-2% for FY25, and expects a credit cost of 2.5% for the EEB portfolio.

Return on Asset (ROA) of bank for quarter stood at 2.5% and ROE at 18.8% improved from 1.9% and 14% in Q1FY24.

Bandhan Bank has reported its performance for quarter and financial year ending March 2024. The bank’s deposits grew by 25% YoY to Rs. 1.35 lakh Cr during the year, and gross advances grew by 14.5% YoY to Rs. 1.25 lakh Cr. During Q4FY24, Bank has technically written off loans amounting to Rs.3,852 crores. On an underlying basis, adjusting for technical write-offs and liquid assets to total deposits (LATD), the advances growth was 20%. The Gross Non-Performing Assets (GNPA) ratio improved to 3.8% in FY24 from 4.9% in FY23, and the Net NPA ratio improved to 1.1% from 1.2%.

The bank’s net revenue for the FY24 was Rs. 12,490 Cr, compared to Rs. 11,728 Cr in FY23. The Net Interest Income (NII) for FY24 stood at Rs. 10,326 Cr, an 11% growth from Rs. 9,260 Cr in FY23. The Net Interest Margin (NIM) for the year was 7.3%.The Return on Equity (RoE) for the year was 10.7%, and Return on Assets (RoA) was 1.4%. For Q4FY24  Bandhan bank has reported ROE 1% and ROA of 0.1% on account of impact of techical write-off done during the quarter. Excluding the impact of write-off done during the quarter, ROA and ROE are at 2.2% and 17% respectively.

The bank's balance sheet size as of March 31, 2024, was Rs. 1.78 lakh Cr, a growth of 14% from Rs. 1.56 lakh Cr as of March 31, 2023. The capital adequacy ratio stood at 18.3%, well above the regulatory requirement of 11%. The Board of Directors recommended a dividend of Rs. 1.50 per equity share for the year, consistent with the previous year.

The collection efficiency for Emerging Entrepreneurs Business (EEB) loans improved to an average of 99% during Q4FY24. The bank's Provision Coverage Ratio (PCR) as of March 31, 2024, was 71.8%.

Having reviewed the legacy portfolio (pre-FY21 originated EEB portfolio) and as a prudent measure, Bandhan has written off loans during the quarter to the tune of Rs 3,852 Cr. The management expects credit costs to be contained at 1.8-2% on an overall portfolio, while EEB portfolio credit costs are likely to be at ~2.5%.

We would like to address the recent developments at Bandhan Bank, specifically the resignation of the Managing Director Mr. Chandra Shekhar Ghosh, which has raised concerns given the context of the past year's executive resignations, including the CFO and Chief Compliance Officer. Understandably, these events may have caused some apprehension about our investment rationale for Bandhan Bank.

The resignation of the MD indeed presents a challenging scenario for Bandhan Bank. These departures, particularly of Mr. Ghosh, the bank's founder who has been a pivotal figure in the making of the Bank, are significant. At 64, Mr. Ghosh's age is a factor that might influence regulatory decisions regarding top executive appointments, as per Reserve Bank of India (RBI) norms. 

The ongoing audit by the National Credit Guarantee Trustee Company (NCGTC) concerning the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGFMU) loan claims adds a layer of scrutiny to Bandhan Bank's operations. The outcome of this audit is pending and could impact the bank's financial health. The asset quality issues that surfaced during the COVID-19 pandemic persist, adding to the bank's challenges. 

It is crucial to note that Mr. Ghosh is not exiting the group entirely. His continued presence within the group structure could provide some continuity, though not in the same capacity. The bank might consider bringing in an external candidate for the MD & CEO position, which could introduce fresh perspectives but also comes with transition risks. 

The positions of CFO and CCO (Chief Compliance Officer) have been effectively filled by Rajeev Mantri and Amitava Goswami, respectively. Rajeev Mantri, with over 25 years of experience in banking and finance and former roles as CFO of Citi India and TransUnion CIBIL, takes on the CFO role. Amitava Goswami, bringing more than 30 years of banking experience and having served as the Head of Branch Operations and Customer Service for over 8 years before transitioning to the new role of CCO. 

Despite these challenges, we note some positive trends in the bank's performance metrics. Performance updates for Q4 showed a sizeable increase in both loans and deposits. The bank saw a boost in its deposit base with a 12.1% QoQ increase in retail deposits, and a 21.9% YoY growth. Loans and Advances saw a growth of 10.9% QoQ and 17.8% YoY. The CASA deposits saw an uptick of 18.2% QoQ and 18.1% YoY. 

We have recently reviewed the performance of Bandhan Bank and other developments happening in the company (Refer Analyst Note). On many parameters the Company does not qualify our framework for being a Core company anymore. Thus, we have decided to remove it from Core 50 coverage.

However, this change does not affect our investment thesis and we still recommend holding onto the stock. We are still covering the company under the Superstar Multi-cap plan.

There is no need to take action for those who have already invested. We will keep you informed of any future updates.

In response to recent media reports regarding concerns over potential loan evergreening practices, Bandhan Bank witnessed a decline in its share price. These reports also indicated that a forensic audit of the Bank’s loan portfolio would be conducted. Let’s delve into a detailed understanding of this development

About Credit Guarantee Fund for Micro Units (CGFMU):

The CGFMU scheme was set up by the Government of India to guarantee payment against default in micro loans extended to eligible borrowers by Banks/NBFCs/MFIs managed by the Board of National Credit Guarantee Trustee Company Limited (NCGTC) as the trustee of the Fund. This was done to enable collateral-free micro loans and overdraft facility under Pradhan Mantri MUDRA Yojana and collateral-free loans to Self Help Groups with the overall objective of financial inclusion. 

Under this Scheme, Banks would pay a premium amount to insure the eligible loan portfolio. Upon default, up to 5% of the loss would be borne by the bank itself and the incremental loss would be borne by the NCGTC. However, on an aggregate level, claims can be made for only up to 15% of the insured amount. 

Under this scheme, Bandhan Bank has insured its portfolio for Rs. 20,800 Cr and disbursed over Rs. 1,950 Cr under the Emergency Credit Line Guarantee Scheme (ECLGS) in FY21. To date, the Bank has received Rs. 917 Cr from the NCGTC. The Bank has already recovered over 20% of the received amount from customers. The Bank made an additional claim of Rs. 1,296 Cr in the second quarter of FY24. However, the total claimed amount remains substantially below the maximum eligible amount (15% of the total insured amount).

Following the additional claim in FY24, an initial sample audit was conducted by an independent agency for the claims raised and NCGTC raised certain observations with the potential of evergreening (In banking parlance, evergreening of loans refers to the practice of a bank giving a fresh loan to pay up an existing loan). Subsequently, NCGTC decided to commission a detailed audit of the claims. 

Management Clarification: 

Management clarified that the audit is initiated by NCGTC, the implementing agency of these schemes and not RBI. It's noteworthy that approximately 85% of the disbursed funds have been repaid by customers. Additionally, the non-performing portfolio is already provisioned at around 88%. 

Chandra Shekhar Ghosh, MD & CEO denying the existence of evergreening said, “If you look at Bandhan's lending practice for the last 23 years, we have been giving single loans per borrower. The practice is until the first loan is not closed, they are not eligible to get the second loan. That means, there is no chance of evergreening". He also emphasized that some of the observations made in the sample audit were inadequate and inappropriate. The audit is ongoing and management expects results within the next few months, expressing full confidence in recovering the funds from NCGTC.

Moneywork4me Opinion: 

Bandhan is seeing pressure in advances growth as it has not come out of the stress in slippages yet. The recovery from NPAs is taking more time than expected. As far as the NCGTC Audit is concerned; Bandhan Bank's management history does not suggest involvement in unethical practices. Even if NCGTC does not fully reimburse the claimed amount, the majority of the NPA book being already provisioned for, the impact on the bank's overall financial health would not be severe. However, we have downgraded the MRP to Rs. 250 due to a consistent increase in slippages.

From our recommended price, Bandhan has corrected about 23%. However, this is a recovery story and the timing of such recoveries can be delayed. As MFI loans are low-duration loans, the payback period is low, thus loan book will get replenished faster than a housing finance or a corporate loan book. This replenished loan book is expected to have lower slippages; in line with the company’s aim of diversifying its loan book.

Even with all the NPA issues, Bandhan still has been able to generate a ROE of 14% which means unless there are any significant incremental slippages, de-rating of P/B should not happen. At CMP, Bandhan trades at P/B of 1.6x, with lower incremental slippages and higher ROE, P/B should get rerated to upwards of 2x. Given the long runway of the business model and structural advantages, we believe that we can make good returns over the long term and thus we advise investors to stay invested. We will be completely agile in tracking future events and if things don’t go our way we will exit our position.