Change in biz mix weighs on Bandhan’s margins

While cost of moving to a universal bank is reflecting on profitability, strong growth, earnings visibility seen

After a sturdy listing in March, which made it India's eighth-largest lender in market cap, Bandhan Bank turned in satisfactory 2017-18 numbers on Friday. Overall assets under management (AUM) rose by 37.4 per cent year-on-year (y-oy) to ~323.4 billion as of March 2018, pushing its net interest income (NII) and net profit up by 26.2 per cent and 21 per cent, to ~30.32 billion and ~13.46 billion, respectively.

But, the bank’s profitability - expressed in terms of net interest margin (NIM) - came down by 70 basis points to 9.7 per cent in 2017-18, owing to a change in business mix, which dragged down overall yields on loans by 160 basis points to 15.4 per cent.

First, in 2017-18, Bandhan lowered its sale of loan portfolio, thus affecting profitability. Around 95 per cent of its portfolio comes under the priority sector, part of which is sold to other banks that are in need of bridging the shortfall of 40 per cent priority sector lending target. Though the bank earns interest on the sold portion, it lowers the on-balance sheet AUM, thereby increasing its NIM.

In 2017-18, the bank issued more priority sector lending certificates (PSLCs), which are tradable certificates issued against priority sector advances. This change in business affected margins by 50 basis points. This helped Bandhan increase its fee income, which as a proportion of total income went up to 12.8 per cent, as against 9.5 per cent in 2016-17.

Secondly, the share of non-micro-finance loans to aggregate loans increased by over 1.5 times to 14 per cent, dragging down the NIM further. The non-micro-finance portfolio attracts lower interest rates as compared to micro-finance loans. As of March 2018, Bandhan's non-micro-finance portfolio stood at about ~47 billion, a more than two-fold rise.

Given its expected persistency in growth and full-year benefits of capital, margins should improve. "The bank will get full-year benefits of capital in terms of NIM. Unlike 2017-18, the pace of branch expansion will be lowered and more focus will be on growth," said Manish Oswal, analyst at Nirmal Bang. Bandhan is expected to grow its loan book by 3035 per cent in the near term.

Although the sequential comparison show a deterioration in bad loans, Bandhan’s gross non-performing assets (NPAs) as a proportion of advances improved to 1.2 per cent from 1.6 per cent as of December 2017. The Street would be keeping an eye on this parameter for further improvement.

Meanwhile, business continues to grow fast. In the March quarter, NII grew 25.2 per cent, operating profit was up 32.8 per cent, and net profit by 20.3 per cent, over the year ago period.

Given the growth visibility and strong management, analysts are positive on the stock and see a 24 per cent upside over the next year, despite it being expensive. “Given the management's efficiency in micro-finance business, expected growth in terms of advances and profitability, earnings are expected to be strong in the near term,” Oswal added.