24-Dec: Midcaps Nosedive, Bandhan Bank’s 91% Haircut & XMAS Smallcase Offer

🔆 Quick glance

• Market Overview: Crisp overview of markets & macros
• Off the Chart: Air travel pre & post covid-19
• Good Reads: 5 good reads from across the globe
• Taking Stock: Bandhan Bank takes 91% haircut
• Capitalmind Smallcase: 3 Portfolios in one subscription. And a discount offer.

What’s up with markets? 📉📈

The Nifty 50 index fell by 2.5% this week with 80% of Nifty 50 stocks declining. So for every stock that went up this week, 4 went down. But, the real pain was felt in MidCap stocks as the Nifty Midcap 100 Index fell by 6% erasing almost all of its gains in 2022.

Off the Chart ✈

While it may seem that life is back to normal in terms of Air Travel, this data shows that it isn’t the case. Aviation Turbine Fuel (ATF) consumption is not yet back to Pre-Covid levels. Also, number of passengers flying each month hasn’t crossed pre-covid levels. The aviation industry is yet to bounce “back to normal”.

Is Bandhan Bank’s book clean now? 🏛

On Dec 21st, 2022, Bandhan bank released a press note stating that it is looking to sell 8,897 Cr of its bad loans to an Asset Reconstruction Company (ARC) for a significantly lower price of 801 Cr. That is a 91% discount on the (wrong) asset value.

You may think this is a good move. Getting rid of rotten apples and making some money off it.

But the bigger question is, what about the remaining loan book? How many more rotten apples are there?

The burden of the past

Around 40% of Bandhan’s advances mainly cater to low-income individuals, SMEs & agriculture needs. This book is its legacy micro-finance book (now called Emerging Entrepreneur Business)
Unfortunately, this segment has struggled for a few years because of Covid, Assam & West Bengal floods, and loan waivers. The bank GNPAs (gross NPAs) has spiked from 1.4% in 2019-20 to 7.2% in Q2FY23.

Due to this, the bank is consistently reducing its exposure to this segment and focusing more on Commercial banking, Housing & Retail segments. Check the data below.

The Green shoots?

In Q2FY23, Bandhan bank had already written off 3539 Cr. The EEB & SBAL book is currently at 58,130 Cr of which it has identified 9500 Cr of stressed assets.

After the ongoing sale of 8,897 Cr, the bank will get rid of a substantial portion of its bad assets. If there are no more rotten apples, we’ll have a nice clean kitchen.

The management is confident of bringing the asset quality back to the pre-Covid levels by next year in the next few quarters.

Is now a good time to invest in Bandhan Bank?

Bandhan bank is currently trading at its lowest valuation on price to book basis (2x) since its listing in Apr 2018. But that alone is not a valid reason to add a financial institution to the portfolio.

Buying cheap may work for other sectors, but not banks. Markets run on perception and the better the perception of the underlying book, the better valuation it commands. Case in point: HDFC Bank, and Kotak Bank as against PSU banks.

Nevertheless, it would be better to wait for the bank to improve its asset quality. Let the NPAs normalize and reduce the dependency on the EEB book. It may take a year for the management to get things back on track. Till then, this is yet another stock that we will be keenly tracking.

(Disclaimer: The information conveyed in this post is intended for informational purposes and shouldn’t be considered as investment advice. Please do your own research before making investment decisions)

What we are reading? 📝

• Messi is known for walking leisurely on the pitch. He’s always analyzing the situation and helping the team by holding ground in valuable areas, waiting for the ball to come to him. Can we draw similar parallels with Investing? Read – Between rest and overdrive
• You never really know when you’re in a bubble, but you always know when you’re in a crisis. Read – Thoughts on Investing
• The better we get at relevance realization, the more adapted we become to our own specific niche. Read – The idea of the year
• Just like our caveman ancestors lost some visual acuity and memory to develop the first iteration of language, we probably will lose some of our features as we become more integrated with technology. Read – Language, Loneliness, and AI
• You don’t have to be right a lot. You just have to be right about your big bets at the right time. Read – When to bet big

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