Macquarie expects 35% downside for Bandhan Bank

Despite a strong performance by Bandhan Bank in the March quarter, Australian brokerage firm Macquarie continues to maintain “underperformance” on the stock citing concern on the quality of new lending.

In a research note, the foreign brokerage said Bandhan in the fourth quarter earnings conference call mentioned that the percentage of customers with which they have sole banking relationships have fallen dramatically from nearly 72% last year to about 60% at present.

“A higher wallet share/being the sole banker partner was one of the primary investment arguments for Bandhan’s superior control over its customers’ cashflows and thus its asset quality,” the research note said.

According to the brokerage, this sudden pivot, whether due to a change in risk management strategy or forced upon due to competitive pressures, especially in the context of consistent increase in ticket sizes (incremental disbursements currently at Rs 59,000 per loan, up 14% year-on-year and Rs 25,000-30,000 for new borrowers in new geographies), is “a big red flag” in its view.

The brokerage said either of the two scenarios – promoter reducing 21% stake through offer for sale and HDFC reducing 15% through open market sale, respectively in the bank, creating supply overhang, or another expensive/ inappropriate merger a year or so down the line – do not bode well for medium-term stock performance.

However, the bank has recently said that it plans to lower its promoter stake to 40% through OFS route and is not considering more acquisitions at present.

Macquarie has maintained “underperform”, with a target price of Rs 400, implying 35% downside. On May 2, the day it announced its quarterly results, the stock closed at Rs 622.60 per piece while it closed at Rs 604.05 a share on Monday.

Meanwhile, three other brokerages JM Financial, ICICI Securities and Arihant Capital remained upbeat and have “buy” and “hold” rating on Bandhan Bank.

In a research note, JM Financial, however, said, “Management disclosed that 60% of Bandhan’s microloan customers now bank solely with Bandhan - this number has fallen sharply from 72% as of Q3FY19.” 

Last week, the bank announced its March quarter results, recording 68% growth in the net of Rs 651 crore in the fourth quarter.

SUNNY SIDE

• Three brokerages JM Financial, ICICI Securities and Arihant Capital remained upbeat and have “buy” and “hold” rating on Bandhan Bank.
   
• ICICI Securities said that robust growth, better margins to remain strong attributes