Bandhan Bank - in a sweet spot?

Stock Opportunities
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Understanding Bandhan Bank better
(notes from conference call July 2019)

No recommendation. Only for educational purpose.

  1. Concern: Risk of over leveraging in Eastern Region. Risk of NPA’s rising.

Over 99% on-time repayment (OTR) by customers i.e. customer repays loan on exact date of repayment without any delay

Around 55% of MFI customers are in three cycle plus by number (65% in terms of value). Borrowing & repaying loan is considered as one cycle. Positive track record of borrowers

About 55% customers are unique to Bandhan i.e. they have not borrowed from any other MFI (better monitoring of over leveraging issue)

  1. Concern: Concentration on Eastern Region

About 46% of loan book is from West Bengal. However, it must be remembered that Bandhan started operations from West Bengal. Captive customers & high cycle borrowers. Loan size is increasing to them

To de-risk, all new branches will be opened outside West Bengal; 80% of new micro finance customers are from non-eastern region

  1. Concern: CASA ratio has fallen over last quarter

Bandhan offering longer tenor fixed deposits at high interest rates to match Gruh’s longer tenor lending. There has been some shift from CASA to fixed deposit by customers.

  1. Concern: Are microfinance customers overborrowing & depositing in saving account to create high CASA for Bandhan?

Retail deposits contribute 76% of total deposits while microfinance customers contribute only 6% of deposits.

  1. Concern: How can anyone borrow at such high rates and expect to pay back the loan?

Microfinance loans are unsecured. Small ticket size (average loan Rs 39,500). Tenor of 1 to 2 years. Other option - borrow from local moneylender who will be charging over 20%+ if not more. Bandhan has also dropped rates to less than 18% (lowest & way below other MFI’s)

Difficult for banks to service such small ticket loans. Operating costs high. Unsecured loans.

Other risks/uncertainties remain
a) Government regulation on maximum lending rate
b) Loan waiver by government destroys credit discipline
c) Equity dilution overhang; Gruh merger will reduce promoter holding to 61%; Need to bring it down to 40%

Call ended with guidance of 35%-40% growth in FY2020

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Above article was written by Krishnamurthy Subramanian, who was then on Board of Bandhan and had quit after being appointed as CEA for this government. Would be surprised if at all the allegations of loan evergreening on Bandhan had happened right under his supervision.

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Well, my first question is why on the earth Krishnamurthy Subramanian being a director of Bandhan will do such evergreening of loans when he was vouching against it?
The next point is Bandhan has a collection efficiency of 99% and par 30 of 0.90. So it is highly unlikely that evergreening of loan is going on.
The third point is Gross and Net NPA is continuously coming down for Bandhan this will also confer the same in terms of asset quality.
If I go by the history of Bandhan they have been able to come out easily from the DEMO effect with keeping the asset quality intact [given the fact that microloan is of short tenure]. Since the integrity of Chandrasekhar Ghosh is unquestionable till date so raising false allegations is not how you analyze your investment thesis.
Moreover, there is also an article about the evergreening of loans by Tamal Bandyopadhyay [adviser to Bandhan Bank] I am sharing below. So, in my opinion,with all these personalities in board it is quite unlikely that Bandhan will be involved in this kind of practice.

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Interview with CS Ghosh.

Hopes to grow at same rates as previously.

No recommendation.

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If we go through both (Chandrashekhar Ghosh’s interview & IFC report), I feel that Mr Ghosh has clearly clarified that MSME is a big basket & Bandhan doesn’t fall under affected part of same. Our bank is driven by very small enterprises & Mr Ghosh doesn’t see any major issue as of now. He is confident of achieving growth similar to recent past quarters.

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could you share the link for the IFC report ?

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Bandhan Bank launches credit cards, in partnership with Standard Chartered Bank

image

In a bid to offer a complete suite of services to its existing customers, Bandhan Bank has launched a co-branded credit card in association with Standard Chartered bank.

The credit card would be offered to 40 lakh savings bank account holders across the 1,000 branches of Bandhan Bank.

As part of the tie-up, while Standard Chartered bank will take the credit risk, Bandhan Bank will be responsible for identifying and issuing cards to its customers.

According to Zarin Daruwala, CEO, Standard Chartered, Bandhan’s current account and savings account (CASA) growth over the last four years has been one of the factors leading to the collaboration.

Standard Chartered has 100 branches in India. It has a credit card base of 12 lakh customers, and has been growing at 15-20 per cent on year-on-year basis.

This is Standard Chartered’s first co-branded card with any other bank. “When the bank started four years ago, we started with basic products. We kept adding more products as we moved ahead. Today, we launch credit cards, a product that many customers demanded from us. Standard Chartered bank’s expertise, experience, and foreign exposure will help bring our customers a well-rounded credit card offering,” said Chandra Shekhar Ghosh, MD & CEO, Bandhan Bank.

CASA accounts for nearly 36 per cent of Bandhan Bank’s total deposit base of about ₹43,000 crore.

The co-branded card will have three variants: One, for the mass market; Plus, for the affluent segment; and Xclusive, for the premium segment.

4242f5b9-e024-49a2-9d06-34c7af984024.pdf (2.3 MB)

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First hand experience of senior citizen monthly income scheme by Bandhan bank -
Duration extended to 10 years (max)
Interest given - 8.34%(whereas Indian postal service MIS interest rate 7.7%)
Long term FD - Duration extended to 10 years. 10 yrs FD scheme cumulative interest is 12.96%(yes, you are reading it correct). All rules are same as other bank,like premature withdrawl penalty 1% etc etc.

Disc : Invested in stock. Invested in FDs. Not a sebi registered financial advisor, Information shared only for knowledge sharing purpose,not a stock investment recommendation.

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Do you have a source/link for this? It seems extremely high.

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Please calculate …

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gallery1080×272 99 KB

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i am getting 8.66% XIRR using these numbers…not sure how did you 12.96%. for clarity sake I assumed invested 7 lakh rupees and received 16.07 lakh after 10 years and no interest in between.

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The rate of interest is 8.4 percent (compounded 3 monthly i.e 8.66% p.a). You are calculating simple interest… Simple interest works a against you in both cases, loans & fdr… In your case, SI comes higher because it does not take into account interest on interest (increasing balance)… in loans, it reduces interest rate as it does not take into account emi (reducing loan value)…

There are many measures of statistics which apply differently in different situations. One can argue in favour of one against the other… However, in case of returns eg interest/growth of deposit/equity etc, only CAGR / interest on cumulative balance is considered appropriate. Rest all are marketing gimmicks… Its possibly the only thing in valuation that is same everywhere and there is no confusion or argument against it.

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To be honest, I am not aware of Excell based XIRR calculation. Thank you for drawing attention on this,will explore more. I do calculate on total interest amount on capital distributed on invested period by taking a percentage of that.

Anyways,anything above 8% in a secured tool is good for me.

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https://m.rbi.org.in/Scripts/NotificationUser.aspx?Id=11677&Mode=0

New notifications by RBI

External Benchmark Based Interest Rate mandatory for certain categories of loans from October 1, 2019

  1. Reserve Bank of India policy Repo Rate
  2. Government of India 3-Months and 6-Months Treasury Bill yields published by Financial Benchmarks India Private Ltd (FBIL)
  3. Any other benchmark market interest rate published by FBIL.

I think this will affect profitability of all banks
Banks have to compensate by increasing prosessing fees or other charges (ofcourse The banks are free to choose one of the several benchmarks indicated in the circular. The banks are also free to choose their spread over the benchmark rate, subject to the condition that the credit risk premium may undergo change only when borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract.)

Deposit rates will also come down

Please share your views
Thanks
Ashit

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Hi Ashit.

The profitability of every sector is affected, and stock prices have corrected to say the least. Even crashed in some cases, individual companies and even entire sectors… then why banking and finance stocks are still demanding the top dollar!

When do you see banking and finance stock price and company profitability reflect the gloom and doom in the Indian Economy?

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Axis Mutual Fund has increased their holding in Gruh. Seems even they took this route to avail Bandhan at reduced rate.

4B02E544_6C6C_4B5B_A57D_F952BF997AEF_110718.pdf (281.5 KB)

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Are there anybody on this forum who is from Eastern part of India ? They will definitely have better visibility than people who only depends on pdf reports and books.

Please share us about Bandhan Bank reputation , Brand, Promoters and any other significant observations.

I am thinking that “Bandhan Bank” is equivalent of “HDFC Bank” or “SBI Bank” for that region.

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I am from West Bengal but I can’t compare Bandhan with HDFC or SBI. But yes they have a popularity among the unbanked sector like house maid , small roti maker shop etc. Special ingredient for them is to get a hassle free trusted banking system. So far this class was mostly dependent on cooperative banks and ponzi scheme or chit fund for sourcing and saving of capital which more often than not turn out to be a fraud but now they have a trusted bank of their own which provide door to door service. This class is mostly loyal and specially the women are credit worthy with their small amount of savings and honesty at work. Problem with them is they do not understand banking system so do not like to go to the branches of SBI or HDFC and here Bandhan is having an edge. Also recently I found Senior citizens are developing a likelihood for this bank for higher interest rate on Savings as well as FD.

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