The stock of Bandhan Bank declined by eight per cent last week, and in one year it’s down 10.4 per cent, in contrast to Nifty Bank index’s 17.4 per cent gains. The bank has been faced with a twin problem for over three years now – that of unpredictable asset quality and limited headway in diversifying its loan book.

Just a few days after assuring investors about a stark improvement on both fronts, the bank announced that ₹8,897 crore of loans are set to be transferred to an asset reconstruction company (ARC). The realisable value of these assets is pegged at ₹801 crore. That’s about nine per cent of the total value of loans sold. These loans comprise MFI loans lent through group lending, agri-loans and loans to small businesses.

There are two ways to look at this sale to ARC.

An optimist will say it’s not a bad deal. The level of NPAs in the bank’s balance sheet stood at ₹6,353.85 crore as on September 30, 2022. Therefore, with the sale to ARC, Bandhan Bank’s NPA issues may get addressed in full. In Q3, the bank’s gross NPA stood at 7.19 per cent, down from 10.82 per cent a year-ago. With the sale of dud loans to the ARC, the bank may be heading back to its pre-pandemic levels on the bad loans front. What’s a bit disappointing, though, is that if benchmarked against a recent big-ticket transaction in the ARC space — that of Yes Bank and JC Flowers, which concluded at about 22 per cent of recovery value — Bandhan Bank’s deal doesn’t seem satisfying on the pricing front. In fact, retail loans are set to have a better recovery rate historically compared to corporate or wholesale loans and from that standpoint also the sale to ARC doesn’t add up well.

The question really is whether this also marks the end of the long dragging asset quality issues and if it does, the bank may truly be on the cusp of a recovery. But, with news of Covid pandemic resurfacing, one needs to wait and watch. That said, the bank needs more than just the asset quality improvement to witness rerating in the bourses. It needs to be fuelled by visible diversification of its loan book; an aspect that Bandhan has been promising to its investors for nearly four years. Despite seven years of operations as a universal bank, Bandhan has managed to reduce its dependence on micro finance loans by just 20 percentage whereas players such as Equitas and AU, which operate a small finance banks and are constrained by tighter loan book related regulations, have managed to become significantly different as banking entities compared to where they started.

In a recent investor meet, Bandhan Bank had promised a full-fledged diversification of business in terms of geographies and products by FY25. Unless investors witness these changes beginning to play out, despite its attractive valuations 2x FY 23 price to book, the bank may still be a risky bet for investors.

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