Uncertain outlook for investors of state-owned Bandhan Bank

Stock likely to remain under pressure until promoters take steps to reduce stake

Investors in Bandhan Bank hit the exit button after the Reserve Bank of India’s (RBI) diktat to freeze its Managing Director and Chief Executive Officer’s remuneration. The RBI’s action is a result of the bank’s promoter entity, Non Operative Financial Holding Company (NOFHC), not reducing its stake from 82 per cent to 40 per cent in three years from August 2015, as required by the universal banking norms.

As the news came after Friday’s market closing, the stock faced heavy selling and was locked in the lower circuit on Monday. This was despite the management’s attempt to pacify investors on Saturday’s conference call.

Experts say the stock may continue to remain under pressure for some time. “Large investors feel the bank has been too lax in complying with the RBI’s mandate,” said a fund manager who believes the stock is highly vulnerable to further correction. “They may shy away from taking fresh exposure till they see the promoters reducing their stake,” he added.

Also, a shake-up in return ratios and profitability of the bank appears probable in the medium-to-long term. Any form of stake dilution — whether a merger with another bank, an acquisition, or NOFHC pursuing other nonbanking opportunities — can be highly dilutive for the bank’s earnings and return ratios.

Accordingly, analysts at ICICI Securities have reduced their target multiple (price-book value) from 6 times the FY21 estimates, to 4.7 times. “The stock could hover at corrected levels till there is clarity from management,” they said. Meanwhile, in the next two quarters, Bandhan Bank’s existing branch network operations (937) may be under pressure. As further branch expansion would require prior approval from the RBI, the bank needs to improve its utilisation to ensure growth.

In a call with analysts, the bank revealed that it currently handles about 3,000 customers per branch, an abysmal utilisation compared to 20,00025,000 customers handled per branch by other commercial banks.

While the bank did plan to slow down on branch expansion upon reaching the 1,000-mark, whether it can afford to do so — when its peers are chasing low-cost deposits to keep a tab on cost of funds — needs to be seen.

In short, investors of Bandhan Bank may have to swallow the bitter pill until the RBI removes restrictions on the bank. Long-term investors have to reset their earnings expectations.