Bandhan Bank: Too much, too fast?

Holistic balance sheet growth remains key task despite accelerated journey in bourses

Recently, Bandhan Bank made quite a splash for displacing YES Bank to become the seventh-most valued bank and for nearly doubling from its IPO price to ~700.

It is also India’s most priced bank in terms of price-to-book value.

Notwithstanding this achievement, those holding the stock for the long haul may perhaps want to ponder if the Bandhan Bank stock has gone up too much, too fast.

That it continues to rely heavily on its well- established micro-finance (MFI) business despite its migration to a full-fledged bank, warrants for some questioning.

Bandhan Bank's loan book remained largely composed of MFI loans in FY17 (87 per cent of loan book) in its first full year of operations as a universal bank.

A year later too, such loans accounted for a meaty 85 per cent of loan book.

Its non-MFI book grew from 12.8 per cent in FY17 to 15 per cent in the June quarter (Q1FY19).

While the past two years have been the best for banks to expand their non-corporate (retail and small loans) book, an accelerated expansion of Bandhan Bank’s non-MFI book would have beefed up its loan book more organically.

Likewise, after a sequential nine per cent dip in its Q1FY19 deposits (to ~307 billion), it would be interesting to see how the bank expands deposits in the near-term.

On the whole, for Bandhan Bank to enter the next league and eventuall become a serious competitor to the likes of IndusInd Bank and Axis Bank, its balance sheet must strengthen by leaps, without relying too much on its tested MFI business.

The bank has shown interest in buying PNB Housing Finance’s business, a move that could bring twin benefits of Bandhan Bank’s promoters seeing a reduction of shareholding in the bank and, more importantly, expansion of its business across products and territories.

However, in the process, investors need to realise that its current profitability ratios (net interest margin now at 10 per cent) may inch lower with a change in loan mix.

As analysts at ICICI Securities explain, given that loans in new verticals are unseasoned, they could surprise the credit quality negatively.

Hence, moderation in valuations — currently at over 5x FY20 book (premium to even HDFC Bank) — is possible.

While these may be issues in the short term , the long-term growth story nevertheless remains intact.

Hence, any meaningful corrections offer buying opportunities for long-term investors.

Interestingly, Bandhan Bank’s stock has no ‘sell’ recommendation, according to Bloomberg.