Bandhan Bank cleansed itself of IL&FS before Gruh merger

Industry:    January, 2019

Microlender-turned-universal bank Bandhan Bank Ltd seems to have realized its folly of venturing too far into non-microloans. Its exposure to beleaguered Infrastructure Leasing and Financial Services Ltd (IL&FS) has sucked out ₹385 crore from its profits in the December quarter (Q3) by way of provisions. That amounts to nearly 13% of the bank’s trailing 12-months pre-tax profit.

The lender has provided for all of its exposure to IL&FS, even as other banks continue to dither on this. Bandhan Bank’s chief Chandra Shekhar Ghosh said he has learnt his lesson from believing in AAA-rated paper. Indeed, small microloans are where his strength is.

The exposure has worsened the bank’s NPA ratio to 2.4% for December from 1.67% a year ago. Had it not been for IL&FS, Bandhan Bank’s gross bad loan ratio would have been 1.3%, according to Ghosh.

But that is about it as far as the bad news for the lender goes. Bandhan Bank’s third quarter metrics were encouraging if one ignores the IL&FS debacle.

Credit growth came at a brisk 46%, led by 27% growth in microloans and 35% growth in non-microloans. The robust disbursements led to a core income growth of 54% and a net profit growth of 10% for the quarter.

The Q3 results were impressive enough for investors to forgive the lender for its IL&FS mistake, as was evident from the 3.8% rise in the stock after the earnings declaration.

Now that Bandhan Bank has put that mistake behind, it would have to make sure the merger with Gruh Finance Ltd is smooth. Considering Gruh Finance’s pristine asset quality, Bandhan Bank would not have to worry about toxic loans.

That Ghosh is aware of the bank’s strengths in small-ticket loans is what makes investors confident that the entry into affordable housing through the Gruh Finance merger will reap rewards.

But as this column pointed out earlier this week, the acquisition was expensive, valuing Gruh Finance at almost 14 times its net worth. Needless to say, Bandhan Bank has to work extra hard to make the acquisition accretive in terms of earnings per share. The bank’s stock has lost 11% since the merger announcement as a result of the high share dilution.

Despite the Gruh Finance merger, Bandhan Bank still has to bring down promoter stake by another 20% to meet regulatory requirements, which means investors may be staring at another large dilution.

The stock trades at four times its estimated book value for fiscal year 2020. For it to be taken seriously by investors, it will have to fix its promoter stake to meet regulatory approval.

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