Bandhan Bank shares have gained 54% since lockdown started⁠— but the numbers will reveal the real damage to rural India from COVID-19

• The bank’s share price is up 54% since the lockdown started and still, it is at half the price compared to December-end.
• JP Morgan has set a target price of ₹330 in the next one year, implying that the stock can still gain about 38% hereon.
• As one of India’s largest microfinance institutions, its balance sheet will reflect the true state of affairs in rural areas.

India’s Chief Economic Advisor Krishnamurthy Subramanian cited data in an interview to say that the reported stress in rural India has been exaggerated. However, the real impact of COVID-19 lockdown on rural India will be reflected in the earnings from Bandhan Bank — one of the country’s biggest microfinance institutions and a listed bank since March 2018 — to be announced tomorrow, May 12.

So far, the share price reflects some optimism. It’s up over 54% since the lockdown starting March 25. However, it is still available at less than half the price compared to December-end. Most of its business is based in the rural outposts of India, which have been more affected by the economy shutting down than the coronavirus disease itself.

Most of Bandhan Bank’s microfinance loans aren’t consumption-based or to migrant workers, giving an edge over other banking institutions. “We continue to believe that Bandhan Bank is the most resilient franchise within microfinance — no consumption-based lending, no lending to migrant workers,” said Bernstein’s report from early April.

This could be its undoing or the pillar on which it survives, according to analysts.

Bandhan Bank has a survived many a crisis
It also has experience overcoming the volatile, and unexpected, disturbances that usually occur in rural regions like droughts, floods and even political violence — and has survived most of it over the past two decades. “Based on past experience and limited disruption in the rural economy as of now, the normalcy in collections should return in three months after the moratorium,” said Emkay Research’s analysis.

“Based on past experience… post cyclones, riots (Darjeeling) and demonetisation, the collection normalcy returned in three months and hopefully, should be the case this time around as well,” added Emkay.

COVID-19 lockdown will hurt Bandhan Bank too, just not as much as others
But that doesn’t mean that Bandhan Bank will be able to undercut the coronavirus impact altogether — it just has a higher likelihood of surviving it. “We believe Bandhan, with a 23% Tier-1 and strong CASA (low-cost) deposits, will survive this better than any competitor. We cut Bandhan's microfinance growth by 50% and increase credit costs by 100% to factor in the disruption,” said Bernstein.

Nonetheless, the bank’s share price has largely been volatile since the lockdown was announced by Prime Minister Narendra Modi on March 25. Geojit Financial Services takes an opposing view stating, “Bandhan Bank, with high exposure to microcredit and personal loans, could see further pressure in case of job losses and pay cuts and also the limited ability of micro-borrowers to repay loans.” Though, so far, its stock looks like it hasn’t lost too much of its value.

The recent controversies in the banking sector — with PMC Bank going under and Yes Bank needing the Reserve Bank of India to come to its rescue — have eroded investor confidence leaving recovery open to question.

Even with Bandhan Bank’s healthy liquidity and asset diversification, asset quality stress will remain a key parameter to watch out for. An initial strike is inevitable, but analysts are divided on how long it will take the bank to recover.

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