Bandhan Bank jumps 12% on new CEO appointment: Signs of revival or a momentary spike?

Bandhan Bank has been facing a tough time. Its stock, which peaked at Rs 742 post the 2018 IPO, has since wiped out substantial shareholder wealth. The bank's share price has declined 20 per cent annually over the last five years despite the raging bull market. Its gross NPAs (non-performing assets) also soared to 10 per cent during the Covid-19 crisis due to geographical concentration.

But a recent single-day jump of 12 per cent in the stock has aroused investor interest. This upward movement was driven by two key developments:

• New leadership: Bandhan Bank's founder, Chandra Shekhar Ghosh, who served as MD and CEO, retired in July this year. This leadership vacuum was finally filled with the appointment of Partha Sengupta as the new MD and CEO on October 10, 2024. Notably, the stock experienced a jump the very next day following this announcement.
  This appointment is positive news as the new CEO has rich experience in West Bengal, which is Bandhan's core operational region. With over four decades of experience in the banking industry, Sengupta brings valuable expertise to the bank's top position.
  
• Positive audit outcome: On the same day of the CEO announcement, Bandhan Bank received a favourable outcome from the National Credit Guarantee Trustee Company (NCGTC). Following a forensic audit, the bank is set to receive Rs 310 crore as a payout for bad loans incurred during Covid.

With these positive developments on the horizon, is Bandhan Bank ready to make a comeback?

Bumps on the road

There are several challenges that could impede the bank's recovery:

• Low profitability: Bandhan Bank's profit margins remain under pressure. For every Rs 100 in loans, the bank earns Rs 7.3 in net interest income (NIM). Out of this, Rs 3.8 goes toward operating expenses, and Rs 3.4 is set aside for loan provisions.
  With such thin margins, the bank depends heavily on other income from its asset management and insurance businesses. However, this income stream, too, has fluctuated over the past few years.
  
• Lower capital buffer: Bandhan Bank operates in the risky microfinance sector, which carries higher credit costs. Its capital adequacy ratio stands at 15 per cent, which is lower than that of most large banks (with much lower credit costs) operating with ratios of 17-18 per cent. Any further pressure on the loan book could strain its capital reserves and put its bottomline at risk.
  
• Better peers at similar valuations: At a price-to-book (P/B) ratio of 1.4, Bandhan trades at a similar valuation to banks like IndusInd, Federal, and Karur Vysya, all of which demonstrate stronger fundamentals and more consistent earnings.

Investors' corner

While Bandhan Bank has laid out plans to build a secure and diversified loan book, the road to recovery remains unclear. The recent positive developments do not address the issues that have held back the bank's performance for years. Moreover, the stock has lost momentum after the single-day jump.

Therefore, betting on the bank based solely on recent events would be premature. Investors should closely monitor the bank's progress over the next few quarters to determine if it can improve loan quality and stabilise earnings.

Disclaimer: This is not a stock recommendation. Investors should do their due diligence before making any investment decision.

Also read: 7 key metrics to evaluate a bank's financial health