Salient features of the IPO:
• Bandhan Bank Ltd. (BBL), incorporated on December 23, 2014, is a Kolkata based lender starting banking operations on Aug’23, 2015. In April 2014, the RBI had granted a banking license to Bandhan Financial Services along with the IDFC.
• As of Dec’31, 2017, BBL operated in 33 States and Union Territories in India, reaching 11.99 million customers through 887 branches, 2,633 doorstep service centres and 430 ATMs, with 2.13 million of customers belonging to general banking business.
At the higher price band of Rs375, BBL’s share is valued at P/ABV multiple of 4.9x (to its post issue FY18 annualized adjusted BVPS) which is at premium compared to industry average P/ABV multiple of 3.2(x).
Below are few key observations of the issue:
• BBL strength lies in microfinance business which is transferred by Bandhan Financial Services Limited (BFSL), parent company of bank, when the BBL started banking operations. At that time BFSL was the largest micro financer with 6.77 million customers and 2,022 doorstep service centres (DSCs).
• Currently, BBL is among the few institutions in India that combines both micro-banking and general banking with 2,633 DSCs catering to the microbanking customers and 887 branches catering to general banking customers as of Dec’31 2017.
• Strong experience in the micro-finance provides an edge for BBL to make better strategies in order to adequately leverage the rising opportunities in the growing Indian retail banking market. Retail advance (micro + other retail loans) accounts for around 91% of advances by Dec’31, 2017.
• BBL set a unique business model under which it continued to focus on high yielding micro finance through DSCs and is also garnering low cost deposits through its banking branches. Only 6% of deposits come from micro loan customers while it accounts for 88% of the loan book. DSCs, generally low overhead compared to banking branch, set deep in unbanked areas and every three to four DSCs linked to nearest branch and thereby customers of these DSCs automatically become customers of the associated bank branches, allowing them to open accounts and conduct their banking needs at the associated branch.
• As CASA ratio of bank stands at 33.2% by Dec’31 2017, low cost of deposits and high yielding loan helped BBL to maintain NIM over 9% and DSCs & branches hub and spoke model kept C/I ratio at ~35%.
• Since the micro loans consists ~88% of book, group based individual lending methodology adopted by BBL helps it to maintain stable assets quality with GNPA ratio at 1.7% and NNPA at 0.8%. However, the bank also escaped from disruption caused by demonetization as it got banking license and accepts old notes as repayment. While, the impact of demonetization had been severe on the businesses on other micro financers like Equitas and Ujjivan among others.
• With CAR ratio at 24.9% by Dec’31 2017, the bank is remained well capitalized, further the fresh issue of Rs36,624 mn is likely to augment its capital base and CAR is likely to increase ~30%.
• Though the bank has increased its network pan India, business is much more inclined towards the East & Northeast area with share of ~80% and ~56% of loan portfolio and branch network. Due to high exposure to some particular region, there is an unsystematic risk to business considering crisis in the southern state of Andhra Pradesh in 2010 led to significant pressure on micro-lenders.
• BBL is expanding into the retail and SME segments which are not as high yielding as micro segment. With the continuity in fullfledged banking operations, margin of the bank is likely to tilt downward to industry average (NIM :~5%) going forward.
• Issue is aggressively priced as BBL is demanding valuation of Rs4,47,301.9 mn valued at P/ABV at 4.9(x) to FY18 annualized adjusted BVPS, making it the 7th most valuable lender. Valuation is expensive compared to RBL Bank at 3.2x, Federal Bank at 1.7x and even higher to well managed banks like Yes Bank at 3.2x, Indusind Bank at 4.8x. Considering all these factors, we are of the view that the issue is aggressively priced factoring all fundamental positives and leaving limited space for further upside. Thus, we assign ‘Subscribe with Caution’ rating to the issue.
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