Bandhan Bank Ltd’s stock price response to its September quarter (Q2FY25) business update has been relatively subdued despite showing impressive business growth. Investors appear to have some reservations regarding the smooth transition in the bank’s management, particularly following the recent leadership changes.
Management Transition and Current Leadership
Ratan Kumar Kesh has stepped in as the interim CEO, taking over from Chandra Shekhar Ghosh in July. His temporary position has been extended by merely a month, prompting investors to closely monitor any announcements related to a longer-term appointment. Kesh has been with Bandhan Bank for nearly two years, and his leadership style and experience will be crucial for the bank’s stability moving forward.
Strong Business Growth Metrics
Bandhan Bank has reported a robust growth in advances, achieving an impressive 21% year-on-year increase to reach ₹1.3 trillion in Q2FY25. Despite ongoing asset quality challenges that keep the market on alert, the bank’s lending growth remains consistent. In parallel, deposits have surged by 27% year-on-year, amounting to ₹1.4 trillion. The loan-to-deposit ratio (LDR) stands at a healthy 92%, indicating that the bank is not under immediate pressure to bolster deposits or cut back on its asset base.
Liquidity Coverage Ratio and its Implications
The banking industry is currently facing stringent requirements regarding the liquidity coverage ratio (LCR), mandated at 100%. This regulation ensures that banks possess an adequate amount of high-quality liquid assets (HQLA) to manage expected net cash outflows during a 30-day crisis. Bandhan Bank’s LCR remains robust at 162%, significantly surpassing the expected range of 117-122%, thus placing it in a sound position compared to several other financial institutions.
Deposit Growth Analysis
While the deposit growth appears healthy overall, a closer look reveals that bulk deposits have increased by a striking 58% year-on-year. In contrast, more stable retail deposits grew only by 16%. The Reserve Bank of India (RBI) implemented a revised definition of bulk deposits in June, categorizing any single deposit over ₹3 crore (previously ₹2 crore) as bulk. These bulk deposits, while beneficial for short-term liquidity, typically carry higher interest rates and present a greater risk of rapid outflows. Consequently, retail deposits as a percentage of total deposits have decreased from 78% in Q1FY23 to 68% as of Q2FY25.
Collection Efficiency Trends
The overall collection efficiency of Bandhan Bank, excluding non-performing assets (NPA), has experienced a slight decline, dropping to 98.2% in Q2FY25 from 98.7% in the previous quarter. This downturn is attributed to reduced efficiency in the emerging enterprise segment, which saw its collection efficiency drop to 98.1% from 98.8% quarter-on-quarter. This particular segment raises concerns as it constituted a substantial 67% of the bank’s total gross non-performing assets as of June.
Valuation and Future Outlook
Currently, Bandhan Bank’s valuation is regarded as undemanding, trading at approximately 1x of the FY26 book value, according to Bloomberg’s consensus estimates. However, the primary drivers for boosting the bank’s stock price will likely revolve around a sustained enhancement in asset quality alongside clear signals regarding the CEO’s long-term tenure at the bank.
