Bandhan Bank’s NPA shocker nutmegs investors, but stock will survive

Bandhan Bank’s NPA shocker nutmegs investors, but stock will survive

MUMBAI: On Thursday, Bandhan Bank reported a sharp jump in its provisions and deterioration in asset quality that shocked investors but did not surprise analysts.

The private sector lender reported a 3.6 times jump in provisions on year to Rs 1,068 crore in the December quarter as it provided for additional stress in its loan book.

Not accounting for the standstill on bad loan recognition given by the Supreme Court, the lender’s gross non-performing loans ratio jumped to 7.12 per cent, as against the reported gross NPA ratio of 1.1 per cent.

The performance caught investors who had lapped up the lender’s stock on the wrong foot, and underscores the uncertainty that they are dealing with when it comes to owning stocks of lenders given the lack of clarity of their asset quality at the moment. Shares of the lender have tanked nearly 15 per cent in two sessions.

Bandhan Bank shares had soared 47 per cent in the previous quarter, as anticipation of easing asset quality and likely improvement in loan collection efficiency in the microfinance segment drove short-sellers to cover their positions, and also attracted long-term investors.

Kotak Institutional Equities said Bandhan Bank’s performance on the asset quality front was a “fresh blow, but not unexpected”. “The long-term growth opportunity, especially outside of microfinance, remains intact, and the bank’s strong liability profile and superior cost structure give it an advantage over its peers,” the brokerage firm said in a note.

Kotak Equities cut its price target on Bandhan Bank by 6 per cent, but retained its ‘add’ rating as it remains positive on the lender’s long-term prospects.

For Bandhan Bank, 2021 is likely to be a turbulent year especially after the deterioration its loan book in the December quarter, said analysts. The upcoming elections in Assam and West Bengal have further clouded the outlook given concerns over likely loan waivers, which will dent the asset quality of its microfinance loan book further.

“We believe that the MFI business is inherently prone to disruptions, be it political or natural adverse events,” said Emkay Global Markets.

Promises by political parties in Assam for loan waivers have already started to reflect in the lender’s collection efficiency, which dropped to 92 per cent in December, from 95 per cent in October.

“Notwithstanding the near term asset quality pain , we remain positive on Bandhan driven by its inherent business moats,” brokerage firm JM Financial said in a note. The brokerage retained its ‘buy’ rating but trimmed price target by 9 per cent to Rs. 500.

CLSA Asia-Pacific Markets said that Bandhan Bank’s pre-provision operating profit is the highest among banks, at 9 per cent of the loan book, and will provide cushion against surging bad loans, but its expects it to struggle on the earnings front in the near-term.

The brokerage firm downgraded the stock to ‘outperform’ from ‘buy’, and cut its price target by a steep 12 per cent to Rs 390.

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