Is Bandhan Bank a Good Long-Term Investment? Analysis and Outlook for 5 Years

Bandhan Bank, a private sector lender in India, has seen a downturn in its stock performance recently, with its shares slipping 10% and hitting an intra-day low of Rs 244.55. This development comes in the wake of the private sector lender reporting weak operational performance for the quarter ending September 2022 (Q2 FY23).

Performance Highlights and Challenges

The bank's net interest income (NII) saw a year-over-year (YoY) increase of 13.3%, but a quarter-over-quarter (QoQ) decline of 12.8% to Rs 2193 crore. This decline is primarily attributed to falling margins. Additionally, the net interest margins (NIMs) reduced by 100 bps QoQ to 7%. The yield decline and a 20 bps cost of funds increase contributed to this reduction.

Sequentially, provisions doubled to Rs 1279 crore, shrugging net profits down to Rs 209 crore, a drastic QoQ decline of 76.4% and 30% YoY. However, the asset quality improved as the GNPA and NNPA ratios fell by 6 bps each to 7.19% and 1.86% respectively.

Expert Analysis and Outlook

Analysts at ICICI Securities suggest that while the balance sheet restructuring is in progress, the operational weaknesses and uncertainties surrounding the stressed pool remain significant concerns. The private sector lender reported a pre-averaging tax (PAT) of Rs 209 crore in Q2 FY23, which is 63% lower, primarily due to weaker operating performance across key metrics like NII, other income, operating expenses, and higher provisions.

Analysts at Motilal Oswal Financial Services (MOFSL) emphasize that in the near-term, the loan growth might be soft as the management has tightened its underwriting standards. Moreover, they are cautiously watching the asset quality, notably the high Special Mention Account (SMA) book, especially in the Assam portfolio, which could potentially keep credit costs elevated.

MOFSL has revised its credit cost guidance for FY23 by 15 basis points, now seeing it at 3%. Furthermore, earnings estimates for FY23 and FY24 have been downgraded by 18% and 11%, respectively.

Conclusion and Future Prospects

Considering the current state of Bandhan Bank, the stock might not be the most attractive choice for long-term investors at the moment. The ongoing restructuring on the balance sheet, alongside operational concerns and uncertainty on the stressed loan pool, pose significant risks. While the improvement in asset quality is a positive sign, the high volatility in earnings and credit costs may deter long-term investment.

Investors interested in Bandhan Bank for long-term gains would be wise to monitor its operational performance, credit quality, and strategic initiatives closely. Any visible improvement in these areas could potentially make the stock a more stable and promising investment over the next five years.